FDVV - FDVV: Tech Focused Dividend ETF

2023-10-12 03:17:07 ET

Summary

• Dividend-focused ETFs may underperform compared to the S&P, but they offer a reliable source of income for investors.
• Fidelity's High Dividend ETF primarily invests in US and international equities with high dividend yields and solid dividend growth.
• FDVV has a sector limit of 35% and a notable allocation to the tech sector, making it an appealing choice for potential growth.

Writing about dividend focused ETFs is always a challenging thing to do because a lot of them suffer from the same thing: underperformance compared to the S&P ( SPY ). However, it's important to acknowledge that chasing total return isn't everyone's main objective. There are a lot of investors out there who love the income that dividends can provide and they love the psychological boost it gives towards staying motivated with investing.

The income provided from these dividend focused ETFs such as Fidelity 's High Dividend ETF ( FDVV ) are rock solid and can pack some serious bill-paying power once enough shares are accumulated. If you like receiving income from your investments without having to manage a bunch of individual stocks, a focused ETF like FDVV may be for you.

Overview

Fidelity 's High Dividend ETF primarily invests in the U.S. and developed international equities. The fund chooses holdings based on a specific criteria, including a high dividend yield, a low dividend payout ratio, and solid dividend growth. The selection process commences with a pool of the 1,000 largest U.S. stocks and the 1,000 largest developed-market international stocks. These stocks undergo a rigorous evaluation based on their dividend yield, dividend payout ratio, and dividend growth.

Sectors with superior overall dividend yield receive a more substantial allocation compared to sectors with lower dividend yield. FDVV's portfolio predominantly comprises U.S. stocks, with a maximum allocation of 10% for international stocks. Additionally, there is a sector-based limit, with no single sector exceeding a 35% allocation.

Structure

As previously noted, something I really like about this fund is that there is a sector limited allocation of 35%. This helps keep the balance and avoids having the fund lean toward any one sector. At the moment, the largest percentage of holdings fall within the tech sector. This is attractive to me because this allocation helps the price capture some of the heavy upside movement with growthier tech companies. For example, the top 3 individual holdings within FDVV are Apple ( AAPL ), Microsoft ( MSFT ), and Nvidia (NVDA).

Another aspect of this fund that I like is the low cost. Total operating expenses come in at 0.29% in the form of a management fee. This means that if you invested $10,000, the total expenses you would incur when selling all of your shares at the end of each specified time period are as follows:

• 1 year: $30
• 3 years: $93
• 5 years: $163
• 10 years: $368

Dividends

As of the latest declared dividend of $0.307 per share, the yield sits around 3.5%. As you can see from the graph above, the quarterly distribution may vary from quarter to quarter but overall the 5 year dividend growth rate sits at an average 3.38% per year.

FDVV sits at an attractive dividend profile with a 3.5% yield when compared against the median dividend ETF yield of 2.59%. As previously mentioned, the largest sector allocation of the fund is within tech. The yield is already attractive enough but a bonus is that major tech giants like Apple, Microsoft, and NVIDIA maintain strong financials and consistent dividend growth. While their individual yields may be tiny, they are highly profitable companies that tend to keep large sums of cash on hand.

Similarly, financials and consumer defensive stocks make up the following majority of the sector allocation and these sectors have promising prospects for substantial dividend increases as the market stabilizes. All of this is to say that I believe the dividend distributions are highly secure and even though the payouts may vary from quarter to quarter, we should see the raises continue over time.

Peers

I believe the main competitor for a fund of FDVV would be Schwab's dividend ETF ( SCHD ). Over the last three years, FDVV has outperformed SCHD in terms of total return. I think this is very likely because of the different portfolio makeup: tech has performed really well over the last 12 months and the sector as a whole has seen huge spikes because of some of FDVV's top holdings. As previously mentioned, the top 3 holdings for FDVV are Apple, Microsoft, and NVIDIA.

• Apple YTD price return: 44%
• Microsoft YTD price return: 37%
• NVIDIA YTD price return: 227%

While you would've been better off holdings these stocks individually, that is not what we are comparing here. I am simply trying to convey that the tech allocation of FDVV has contributed to its outperformance compared to its peers like SCHD. Over a longer time horizon SCHD has beat FDVV in total return. I think that I would personally choose FDVV over SCHD for the next decade as I do believe that the tech industry will continue to be the best place to grow your money. SCHD's allocation makeup leans more towards industrials and healthcare.

Once again, I'd also like to emphasize that total return isn't every investors' goal. If you compared FDVV's performance to SPY or VTI, we can see that it underperforms these indexes. In my opinion, I would be okay with trading off some total return in exchange for a higher slice of income without having to sell the underlying assets. This may be a more suitable investment for those nearing retirement and looking to live off the income their portfolio produces.

Takeaway

Investing in dividend-focused ETFs, like Fidelity's High Dividend ETF, offers a unique approach to building wealth. While such ETFs may not always match the S&P's performance, it's crucial to recognize that not all investors prioritize total returns above all else. FDVV's income potential is substantial, and as shares accumulate, its dividend payouts can become a formidable source of financial stability. If you seek a passive income stream without the complexities of managing individual stocks, a focused ETF like FDVV might align with your investment objectives.

This ETF's structure, with a sector limit of 35%, safeguards against over-concentration in any single sector. Presently, it has a notable allocation to the tech sector, providing potential for growth in tech companies. Top holdings in FDVV include major players like Apple, Microsoft, and Nvidia. Compared to peers like Schwab's dividend ETF, FDVV has outperformed over the past three years, largely due to its tech-heavy allocation and robust holdings. While past performance is not indicative of future results, FDVV's tech-oriented focus makes it an appealing choice for potential growth over the coming decade.

FDVV presents an attractive option for investors seeking income and long-term wealth accumulation, backed by solid dividend distributions and a diversified portfolio.

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