DVYE - DVYE: A High Yield To Avoid

2023-05-19 09:57:13 ET

Summary

• DVYE invests in high-yield stocks in emerging markets.
• It seems to own a lot of stocks whose yield is boosted by one-time special dividends. It also has many yield traps.
• It has very few stocks with consistency and the fund suffers from high turnover.
• The fund has been underperforming significantly since inception, and this isn't likely to change anytime soon.

iShares Emerging Markets Dividend ETF ( DVYE ) currently supports a dividend yield of 10% by investing into more than 100 international stocks that pay high dividends, but I believe this fund should be avoided by most investors because it has a track record of low performance which is unlikely to change in the near future due to its strategy.

Negative returns

The fund was created in 2013, and it's been around for a decade. The fund's stock price is down -54.88% and its total return (including reinvestment of dividends) is down -16.14% during this period, even though 9 out of these 10 years were during a strong global bull market.

Yield traps

One of the reasons this fund underperforms is that it invests in a lot of stocks that would be considered "yield traps". This refers to stocks with exceptionally high dividend yields that investors buy in hopes of high income, but they lose far more money in their principal erosion than they make from dividends. In many cases it turns out that those high yields weren't sustainable anyways, and they get lowered or canceled, which gives another hit to the share price. Investors should never buy a stock simply because of its yield. I would say this practice is not ideal even when picking bonds, and absolutely a terrible idea for stocks.

Since most yield traps can't sustain their high yields for long, the fund has to jump from stock to stock, buying the next yield trap and hope to milk it before it also cuts or eliminates the dividend, resulting in a crash. This is why the portfolio historically has a high turnover rate (57% in 2022, 130% in 2021, 46% in 2019 just to give examples) which means in a given year the fund changes about half of its holdings in order to seek the next high yielder.

The fund also seems to have a lot of stocks that paid a "special dividend" last year which artificially inflated their dividend yield, but they may not pay a similar dividend this year. For example, one of this fund's biggest holdings United Tractors ( PUTKY ), an Indonesian tractor company, recently paid a special dividend that is roughly 5 times as large as its typical dividend payments which boosted the stock's dividend yield significantly. When a company pays a large dividend, this amount is often reduced from its share price, which makes the dividend yield appear even bigger than it is. For example, if a company trading at $40 gives out a special dividend of $10, its stock price will drop to $30 on the ex-dividend date and its apparent yield will rise from 25% to 33% even though people originally paid $40 for that stock to receive that dividend.

Another one of this fund's largest holdings is ASUStek Computer ( ASUUY ). The Taiwanese company also announced a special dividend last year where it paid triple the amount it typically pays, boosting the stock's dividend yield from 5% to 15%. Will this be repeated next year? We don't know. If the dividend yield drops back to 5%, the fund will probably dump the stock and buy another high yielder, which happens to have a special-dividend boost.

Many of the stocks held by this fund have high current yields, but they also have erratic dividend histories. There are very few stocks in this fund that have a strong history of consistently raising dividends in a sustainable and predictable fashion. On the other hand, there are many stocks that pay 10% yield one year just to pay no dividends next year followed by paying 6% in the next and 12% in the next, so you never know what you are getting. I believe this is one of the reasons this fund has such a high turnover rate (as high as 130% in 2021).

Currency risk

The fund collects dividends in local currencies and converts them to the US dollar before passing them to American investors. Many of the dividends in the fund are paid in currencies that are far more volatile than the US dollar. In some cases, currency fluctuations can affect your dividend payments by as much as 20-25% which could be considered an additional tax. To be fair, this issue is not specific to this fund. You'll face this issue every time you invest your money in emerging markets. There are funds that try to hedge effects of currency to stabilize your income, but this fund is not one of them.

Russia exposure

A couple of years ago, the fund had a pretty sizeable exposure to Russia due to high dividend yields offered by Russian stocks. As the Russian stock market crashed and Russian stocks started getting delisted, the fund had to write off a large portion of its stock holdings that it wasn't able to close in a timely manner. Moving forward, this doesn't necessarily pose a risk to investors of this ETF, but it's still worth noting this so that investors are aware of the things that have gone wrong in the past and make informed decisions about possible things that could go wrong in the future that they might not have thought of before.

Overall the fund is rated pretty poorly by Morningstar in terms of overall rating, 3-year, 5-year and 10-year periods.

I can understand how a lot of investors might be desperate for high yields even after short-term bond yields climbed from 0.25% to 5.25% and how funds like this tend to attract yield-hungry investors, but there are plenty of better places to get a good yield without losing a lot of your capital. Many times, I hear dividend investors claim that share price depreciation doesn't matter because they only invest for income, but funds with eroding NAVs also tend to cut dividends in the long term because it becomes more and more difficult for them to sustain those yields with a shrinking NAV. Also, if one day you find yourself a better investment opportunity you may have to sell your existing shares to move to this new opportunity, so it's always a good idea to pay attention to your share price and total return even if you are a purely dividend investor, and you only invest for income.

There are many stocks out there with yields as high as 8-10% but if their value drops by at least that much year after year, investors are actually losing money. You don't want a fund that takes your money and gives it back to you slowly (while also charging you a fee for this). You want a fund that takes your money, grows it and shares their earnings with you. Unfortunately, this fund isn't one of those funds, though. In conclusion, I would stay away from this fund as I believe its strategy will result in underperformance in the long run.

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