GE - TDVG: A Promising Dividend Growth ETF

2023-08-29 18:22:34 ET

Summary

• T. Rowe Price Dividend Growth ETF is an actively managed fund focused on dividend income and long-term capital growth.
• It is well-diversified across several sectors.
• The TDVG ETF is similar to the S&P 500 regarding valuation metrics, but it is superior in quality.
• Total return since inception is close to competitors, and the year-to-year dividend growth is much better.

TDVG strategy and portfolio

T. Rowe Price Dividend Growth ETF ( TDVG ) started investing operations on 08/04/2020 with an objective of " dividend income and long-term capital growth." It is an actively managed fund, which offers a lot of flexibility. On the downside, the strategy is impossible to duplicate or backtest like index-based exchange-traded funds, or ETFs. Moreover, this fund doesn't disclose its holdings on a daily basis like most ETFs do. As of writing, the website shows the top 10 holdings as of 7/31/2023 (1-month delay) and the full holding list as of 6/30/2023 (2-month delay). However, a daily proxy portfolio is available, with a current overlap of 93.68% relative to the real portfolio. The fund's expense ratio is 0.50%.

As described in the prospectus by T. Rowe Price, stock selection criteria include:

• above-average earnings and dividend growth;
• current dividend yield;
• a sound balance sheet and cash flow;
• a leading market position;
• attractive valuation ratios.

The fund is almost exclusively invested in U.S. companies (about 95% of asset value), mostly in large and mega caps (82%).

As with the large-cap benchmark S&P 500 (SP500), information technology is the heaviest sector. However, the fund is better-balanced in its top 4 sectors: technology, healthcare, financials and industrials weigh between 14.8% and 18.8%. Other sectors are below 10%. Compared to the S&P 500, the fund underweights technology, consumer discretionary and it almost ignores communication. It overweights mostly industrials and materials.

The top 10 holdings of the proxy portfolio, listed in the next table with fundamental ratios, have an aggregate weight of 25.5%. Microsoft and Apple weigh over 10% together, and risks related to other individual companies are low.

Historical performance

The next chart plots the total return since inception of TDVG, compared with SPY and four large-cap dividend growth ETFs:

• ProShares S&P 500 Dividend Aristocrats ETF ( NOBL ).
• iShares Core Dividend Growth ETF ( DGRO ).
• Vanguard Dividend Appreciation Index Fund ( VIG ).
• Schwab U.S. Dividend Equity ETF ( SCHD ).

SCHD is leading the pack. TDVG is close to other competitors.

In 2023 to date, SPY beats the dividend funds, but TDVG is the second-best performer by a short margin, just behind VIG:

The next chart compares the distribution growth rates of the same funds between 2021 and 2022. In this regard, TDVG is the best performer, and 100% of distributions are reported as net income (no capital gain). A note of caution, though: the fund's history is too short to assess the strategy. Anyway, it is interesting to note that the dividend aristocrat fund ((NOBL)) is the only one in this list with decreasing annualized distributions from 2021 to 2022.

Portfolio valuation and quality

Valuation ratios are close to S&P 500 values. In this regard, TDVG isn't better than the benchmark.

In previous articles, I have shown how three factors may help cut the risk in a dividend portfolio: Return on Assets , Piotroski F-score , Altman Z-score . My core portfolio holds 14 stocks selected using these metrics (more info at the end of this post). I have scanned the proxy portfolio with these quality metrics. I consider that risky stocks are companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or dubious Altman Z-score, excluding financials and real estate, where these metrics are less relevant. With these assumptions, only 6 stocks out of 102 are risky, and they weigh about 3% of asset value, which is a good point.

Based on my calculation of aggregate metrics reported in the next table, the proxy portfolio's quality is superior to the benchmark.

Takeaway

T. Rowe Price Dividend Growth ETF is an actively managed fund in the dividend growth arena. It is well-diversified across several sectors. TDVG is close to the S&P 500 regarding valuation metrics, but it looks superior in quality. The fund's history is too short to assess the strategy, but it is promising: total return since inception is close to competitors, and the year-to-year dividend growth is much better.

For further details see: