SDIV - SDIV: A Poor Way To Obtain A High Dividend Yield

2023-10-03 00:01:37 ET

Summary

• The Global X SuperDividend ETF aims to invest in high dividend yielding equity securities, but has achieved negative total returns on 3-, 5-, and 10-year look-back periods.
• SDIV is composed of equities from diverse sectors such as mortgage REITs, energy, and vanilla REITs, each with different risk factors.
• Dividend investing based on yield only has many flaws in terms of constructing a robust long term buy and hold portfolio.
• Retail investors should consider individual ETFs for specific subsectors, such as the VanEck Mortgage REIT Income ETF and the iShares MSCI Global Energy Producers ETF.

Thesis

The Global X SuperDividend ETF ( SDIV ) is an equity exchange traded fund. The vehicle is catered towards retail investors seeking high dividends by aiming to invest in the highest dividend yielding equity securities in the world. The fund does this by seeking investment results that correspond to the price and yield performance of the Solactive Global SuperDividend Index .

Dividend investing is a very popular theme among retail investors, especially retirees. In our mind there is a right way to go about it and an erroneous way. Portfolio allocation is the cornerstone of a healthy buy and hold investment nest, and risk factor analysis is the most important aspect here. Buying a fund just because it has a high dividend never results in healthy long term results. And SDIV is a point in case for this thesis:

Despite its 12% dividend yield, SDIV has achieved negative total returns on 3-, 5- and 10-year look-back periods. That translates into an investor who put $100 into SDIV ten years ago, having just $97.66 now. Said investor would have also paid taxes on the respective distributions yearly, hence the actual after-tax loss would be greater.

Risk Factor Investing

A retail investor should never buy an instrument for yield, but always look at the risk factors that drive the performance of said instrument. Let us have a look at SDIV from that lens:

This fund is composed of equities from very different areas of the investment world, from Mortgage REITs to Energy equities and Financials.

Let us look at a couple of examples and identify the risk factors behind them. One of the mREITs in this fund is Annaly Capital ( NLY ), a very well-known mortgage REIT. The name is present with a 0.95% weighting in the portfolio, but overall Mortgage REITs account for 21.87% of the fund.

As per its Seeking Alpha profile, Annaly Capital:

Engages in mortgage finance. The company invests in agency mortgage-backed securities collateralized by residential mortgages; non-agency residential whole loans and securitized products within the residential and commercial markets; mortgage servicing rights; agency commercial mortgage-backed securities; residential mortgage loans; and agency or private label credit risk transfer securities.

In essence NLY buys MBS bonds and finances them shorter term via the repo market. The company profits when the MBS to Treasuries/Repo spread is high. So the main risk factor here is MBS/Treasuries spread. As spreads have widened NLY has lost value:

NLY is down -24% on a total return basis since the beginning of 2022 when spreads started moving upwards. Despite its very high dividend yield, the dividend was not enough to compensate for the loss in value driven by the main risk factor for the name.

Energy is another largely held sector by SDIV. Civitas Resources ( CIVI ) is a name with a 1.1% allocation in the portfolio. CIVI is an energy exploration and production company that engages in the extraction of oil and natural gas primarily in the Rocky Mountains and Permian regions. The company's share price is mainly driven by the global price of oil:

As oil prices have moved higher in the past two years, CIVI has profited via larger net income levels and free cash flow numbers. This increased operational profit has resulted in an increase in the company's dividends.

A third company present in the collateral pool is SL Green Realty Corp ( SLG ):

SLG is a company we know well, having covered it here and here in the past year. SL Green is a NYC based Office REIT, and its exposure is entirely to Class A office properties in New York City. SLG's main risk factor is the price of commercial office property in NYC.

The REIT has been badly bruised in the past years, as higher rates and the 'work from home' trend has taken a heavy toll on NYC office valuations:

We estimate that SLG will start outperforming again once the Fed cuts rates significantly, and the NYC office market comes back to pre-pandemic occupancy levels.

Pooling Holdings by Dividend Yield has poor long term results

We have just seen from the above section how diverse the collateral pool is and how the underlying risk factors for each sector in this fund are extremely different. This lack of homogeneity is not a good trait for SDIV.

When a retail investor looks to put their hard-earned money to work, they need to fully understand what drives the returns of that investment. It is not the case for SDIV as we have seen above. Buying equities just because they have high dividend yields only results in long term capital destruction, as entry and exit points are not readily transparent.

While oil was embarking on a multi-year up cycle in 2022, mREITs were doing the complete opposite. Similarly, Office REITS were beginning to lose value as higher Fed Funds increased financing costs for CRE lending.

We do not think that following a methodology like the one embarked by the Solactive Global SuperDividend Index is a profitable one long term. We see significant flaws from a financial engineering perspective via this type of index.

Risk Factor solutions for a Retail Investor

The best way to invest in the SDIV holdings is via a risk factor decomposition. For example:

• for the mREIT subsector in SDIV, a retail investor can look at the VanEck Mortgage REIT Income ETF ( MORT ) and decide what an appropriate entry point is
• for the Energy subsector, an investor can look at the iShares MSCI Global Energy Producers ETF ( FILL ) which we covered here , and make a decision on the best entry point
• for REITs in general, said investor can have a look at the Vanguard Real Estate Index Fund ETF Shares ( VNQ ) and use its valuation metrics and sensitivity to interest rates to pick an optimal entry point for a buy and hold position

Conclusion

SDIV is an equity exchange traded fund. The ETF aims to replicate the Solactive Global SuperDividend Index which includes the top dividend yielding equities in the world. Dividend investing is a popular theme for retail investors. However, simply adding names to a fund because they have a high dividend yield is not the appropriate way to compose a buy and hold portfolio. SDIV's historic performance is a testament to that, with negative returns on all contemplated time periods.

The issue with SDIV is the mélange of very disparate industries with very different risk factor drivers. The ETF contains large mREIT, Energy and REIT buckets. In the article we have analyzed names from each sub-sector and identified the main value risk drivers for each one.

We are firm believers that a healthy portfolio construction should contain individual 'bricks' which have readily available and transparent risk factors. It is not the case for SDIV. The article presents individual ETFs for some of the SDIV subsectors, and retail investors would do well to sell SDIV and then pick and choose the sub-sectors which best align with their views on the overall economic cycle and forward.

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