DGRW - HDV: Low Share Price Upside Makes Returns Unattractive

2023-07-28 15:12:34 ET

Summary

• iShares Core High Dividend ETF may not be the best choice for investors looking to generate strong risk-adjusted returns.
• The difficult conditions for its large number of stock holdings in the healthcare and energy sectors may have a negative impact on its portfolio and share price performance.
• Investors may look at other dividend ETFs like WisdomTree U.S. Quality Dividend Growth Fund ETF for healthy returns.

Investors need to exercise caution when choosing dividend-focused ETFs, as some categories may not be yielding the best returns in today's market trends. For instance, the iShares Core High Dividend ETF ( HDV ) might not be the best choice for generating strong returns due to the weak fundamentals of its portfolio holdings. While its dividends are presently secure, the decreasing earnings growth potential of its portfolio holdings could negatively impact share price performance. Therefore, relying solely on HDV's high yield may not be sufficient for investors to achieve a satisfactory return on investment.

What Makes HDV Appear Unattractive?

In 2023, shareholders of the iShares Core High Dividend ETF may be disappointed with its lackluster performance. The ETF's shares have experienced a downward trend in the first half of the year, resulting in a total return of only 2%. This return might not be as appealing as other safer investment options, like bonds, CDs, and fixed deposits. Additionally, when compared to the S&P 500 index, the HDV appears to be significantly less attractive. Year to date, the ETF's total returns have lagged far behind the S&P 500's total return of over 20%. Aside from past performance, HDV does not seem like the most appealing choice given the likelihood that the bullish market conditions driven by technology will persist in the future. Its shares have limited upside potential due to challenging conditions for its portfolio holdings, which I will discuss in detail later in the article.

Stocks and ETFs that pay dividends are more appealing than bonds and fixed deposits as they provide a combination of dividends and capital growth. This combination has also enabled dividend-focused stocks and ETFs to outperform the S&P 500 returns in recent decades. However, dividends alone are not sufficient to make stocks or ETFs an appealing choice. If they lose the ability to maintain consistent price appreciation, they will not be able to offer healthy returns or beat the market. This makes sense in the current high-rate environment where the investor can easily earn mid-single-digit to high single-digit percentage interest without taking any risk.

Why is HDV Expected to Underperform?

In addition to the bullish market environment, HDV also seems unattractive due to fundamental issues with its portfolio holdings. The majority of the companies in its portfolio have a proven track record of paying dividends and offering high yields. The majority of these companies are in the healthcare, energy, and financial sectors, accounting for more than 60% of HDV's overall portfolio. Unfortunately, these sectors are currently facing significant challenges that may result in a slowdown or decline in revenue and earnings growth.

For example, the energy sector has been struggling in 2023 due to a significant drop in crude oil and gas prices over the previous year. The S&P 500 energy sector has fallen 2% so far in 2023. According to FactSet data , the energy sector is expected to have negative earnings growth of more than 30% in fiscal 2023. Exxon ( XOM ) and Chevron ( CVX ), HDV's two largest energy stocks, are also vulnerable to adverse conditions. Wall Street forecasts that CVX's earnings may decline by 31% in 2023 from the prior year while XOM's earnings may plunge by 35%.

On the other hand, healthcare companies are also vulnerable to financial losses. Since the beginning of this year, the S&P 500 healthcare sector has struggled to trade in the green. Johnson & Johnson ( JNJ ) is down 2%, AbbVie Inc ( ABBV ) lost 8% of its share value, and Pfizer Inc ( PFE ) fell 29%. These stocks are among HDV's largest healthcare holdings. Wall Street expects AbbVie's earnings to fall 20% in 2023 compared to the previous year, while Pfizer's earnings could plunge by 49%. Its portfolio includes a large number of healthcare-related businesses that are struggling to maintain revenue and earnings growth. Earnings in the healthcare sector is expected to fall 13% in 2023, according to FactSet data.

In HDV's portfolio, other defensive industries like utilities, consumer defensive, and industrials account for about 15% of the total weight. Companies in these sectors have the potential to generate consistent revenue and earnings growth, allowing them to generate long-term cash returns. However, when compared to growth stocks, their share price performance remains subpar, particularly during bull markets. For example, Coca-Cola ( KO ), a well-known dividend aristocrat, posted a negative share price return in 2023. Stocks from high-growth sectors, which are driving the current bull run, account for a small portion of its portfolio. Overall, it seems that HDV's portfolio holdings may face challenging conditions that could put pressure on its share in the near future.

Where to Look At?

There are a number of other dividend categories that offer a healthy combination of dividends and share price returns with lower risk. WisdomTree U.S. Quality Dividend Growth Fund ETF ( DGRW ) is one of the best ETFs in the dividend growth category, with a well-diversified portfolio and exposure to high-growth sectors like tech and consumer cyclical. Its portfolio includes fast-growing companies such as Microsoft ( MSFT ), Apple ( AAPL ), Cisco Systems ( CSCO ), Nvidia ( NVDA ), and many others. The portfolio also has a quarter of its weight in stocks from the consumer defensive and industrial sectors. The struggling energy sector accounts for only 0.5% of DGRW's portfolio, while healthcare represents 13%.

DGRW's holdings in high-growth stocks allow it to generate healthy gains during bull runs, while its stake in defensive sectors enables it to reduce volatility during downtrends. Moreover, there is a stark contrast between DGRW and HDV's portfolio holding from consumer defensive and industrial sectors. HDV's stock selection methodology is based on dividend yield, while DGRW focuses on dividend growth and other financial growth drivers. Year-to-date, DGRW generated a total return of around 14%, compared to HDV's returns of 2%. It has also outperformed the broader market index in the last five years, with a total return of 71% compared to 61% for the broader market index. To learn more about how DGRW can provide impressive returns, click here .

In Conclusion

It is not a good idea to invest in an ETF that only offers a high yield, but lags in terms of potential share price growth. HDV has significant holdings in the healthcare and energy sectors, which may have a negative impact on the performance of its entire portfolio and restrict the upside potential of its share price. The stock has also earned a hold rating based on SA's quantitative analysis, primarily because of the low share price momentum and high-risk factor. Therefore, investors seeking to achieve strong total returns in a bullish market environment should explore other options.

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