FDVV - DGI ETF Investors: Don't Make These Common Mistakes When Screening
2024-03-05 09:00:00 ET
Summary
- DGI investors buy companies with long histories of increasing dividend payments. The strategy works because it shifts investors' attention to regular income payments, meaning they'll stay invested for longer.
- ETFs can supercharge the DGI strategy through rebalancings, regularly allocating more to higher-yielding stocks. In addition, investors can take advantage of an ETF's unique structure to avoid tax consequences.
- However, ETF screeners, as currently designed, are inadequate for DGI investors. They provide little to no information about an ETF's dividend safety, growth, or quality.
- This article solves that problem and summarizes various dividend, profitability, growth, and valuation features for four DGI ETFs: SCHD, FDL, PEY, and FDVV.
- My main goal is to help you become a better DGI investor. ETF screeners can be your launching pad to find a suitable long-term fund, but your analysis should not stop there.
Introduction
Dividend Growth Investing, or DGI, is a straightforward but popular investment strategy whereby an investor purchases shares of companies with long histories of paying and increasing dividend payments. The strategy works because it shifts the attention to dividend payments over total returns, increasing the odds that you'll stay fully invested for longer. As noted by the Schwab Center For Financial Research, time in the market beats timing the market. If the DGI strategy helps you do that, I have no complaints.
While this strategy works for investors building a portfolio of individual stocks, many attempt to apply the same approach to ETFs. Unfortunately, these investors are making a mistake because they ignore that ETFs and individual stocks are different products. By relying solely on metrics like an ETF's historical three- and five-year dividend growth rate, investors skip other metrics they'd usually scan for with individual stocks, including:
- profitability (net margins, free cash flow margins, ROE)
- growth (historical and estimated sales and earnings per share growth)
- debt structure (debt-equity, debt-free cash flow)