2023-09-13 14:38:46 ET
Summary
- Global X SuperDividend U.S. ETF has underperformed overall indices since its inception, with a total return of less than 3% in a decade.
- The fund's high dividend yield of 7.2% comes from stocks that may be "yield traps" with unsustainable dividends.
- The fund's focus on high-yield stocks may cause it to miss out on the potential growth of stocks with lower yields.
- Investors should look beyond initial yield if they want to get best returns for their investment.
Global X SuperDividend U.S. ETF ( DIV ) is a passively-managed index fund that tries to track an index called " SuperDividend U.S. Low Volatility Index " by full replication method in terms of selection of stocks and their weighing. This is another fund with a confusing name because it has both " Global " and " U.S. " in its name but the fund is domestic, at least all its holdings are American. It just happens to be managed by a company called Global X. I believe this fund is not the best fund for income oriented investors, and it is likely to underperform in the long run both in terms of share price, total return and dividend growth because of its overreliance on high yield alone.
As I mentioned above, this fund tracks an index called SuperDividend U.S. Low Volatility Index. This index includes companies headquartered in the US with a market cap of at least $500 million that has paid dividends in the last 12 months. The index includes common stocks, Master Limited Partnership and REITs but it excludes BDCs (Business Development Companies). The index only looks at a company's dividend yield in the last 2 years so it doesn't take long-term dividend trends into account. The index ranks stocks based on their 12-month yield to determine inclusion which can be problematic.
DIV which has been tracking this index has been around for nearly a decade and it's been underperforming overall indices since then. The fund's share price is down -35% since inception and its total return (after reinvestment of dividends) is 32% in a decade which means a compounded average annual return rate of less than 3% while S&P 500 index resulted in total returns of almost 250% during the same period.
The fund currently has a dividend yield of 7.2% which is in line with where it's been for the most of last decade with the exception of a brief period in March 2020 where it yielded well above 10% for a couple of weeks and a period last year when it yielded about 4%. The fund yielded within a range of 5-8% for the most of its existence.
Virtually almost all of the fund's dividend yield comes from the dividends it receives from its holdings. The fund is able to pay such a high dividend yield because it buys and holds many stocks that yield anywhere from 5% to 10%. The problem with this approach is that many stocks that have high yields are basically what we call "yield traps". The fund doesn't look at whether a stock is a yield trap or not, whether a company has a history of hiking dividends or not, whether the current dividend is sustainable or not or whether the dividend is supported by actual earnings. It buys high yielders that are part of the aforementioned index and holds them until it is no longer a high yielder anymore.
The fund's top holdings include a lot of energy plays, including MLPs because that's where high yield is most frequently found. MLPs distribute virtually all of their income in dividends so they have high yields but limited growth. The fund also contains some REITs, finance stocks and mix of other sectors. The fund's holdings have an average P/E of 10, average price to book value of 1.4 and average beta of 0.75 which means it is likely to have low volatility but also low growth.
Many times, a stock becomes a high yielder simply because its share price took a deep plunge as a result of something going wrong. A stock that typically has a 3% yield will drop by 50% and suddenly become a 6% yielder. Those stocks rarely stay as high yielders because they usually represent companies in deep trouble and they usually end up cutting dividends.
Another problem with this approach is on the selling side. Let's say the fund buys a stock that yields 6% but the stock starts recovering and having a rally because the company is doing much better. Suddenly, the stock's dividend yield drops to 4% because its share price has appreciated a lot. The fund might end up selling this stock simply because it's not part of the high yield index anymore, and it might miss out on remainder of the recovery and rally.
There is a famous saying in investment that goes " you must let your winners run and cut your losers loose ". This is because when certain stocks are in trouble, they tend to stay in trouble for a long time and when a stock is outperforming, it tends to outperform for longer periods of time. If you have a fund that usually buys losing stocks (because they have a higher yield), keeps losing stocks for longer periods of time (because they have a higher yield) and sells outperforming stocks (because they have a lower yield) you are going to be stuck holding a basket of underperforming stocks. It's like going to a grocery store and buying the cheapest products you can find regardless of overall quality, expiration date, ingredients and taste simply because they are cheap.
Below you will find the dividend history of the stock. Notice that there is no dividend growth year over year. If anything, there is some shrinkage. A decade ago the fund was paying 15 cents per share (per month) but now it's only paying about 10.5 cents (per month). This means while your initial income will be high, it could drop from year to year which is what happens with yield traps.
If you bought $10k worth of this fund 10 years ago and reinvested your dividends along the way, your income would grow at a slow but steady pace but if you bought a dividend growth fund your dividend income would grow at a much faster rate even though your original income might have been smaller. In the below experiment we are going back in 2013, buying $10k of DIV, $10k of a dividend growth fund ( DGRO ) and $10k of a fund that has a mix of decent initial yield (~3%) and dividend growth ( SCHD ). Let's look at our results after reinvesting all dividends for a decade. Notice that in our first year, DIV gets a much larger yield than the other two. It gets a dividend that's more than the other two combined. Over time, the gaps keep getting smaller and smaller though. SCHD completely catches up with DIV by 2020 and passes it afterwards. DGRO also comes very close to catching up, and its income rises from 1/3th of DIV to 4/5th of DIV. At this rate, its income will catch and pass DIV in a year or two. This is how dividend growth works in the long run.
Things look even more dramatic for total returns. Basically, both funds leave this fund in the dust almost from the get go and the gap keeps growing each year. Clearly, yield-chasing doesn't result in good returns in the long run as compared to growth and quality.
Looking ahead, I expect this fund's underperformance to continue because it will continue to focus on dividend yields alone, and this strategy has already proven not to be a winner in the long run. The fund will continue acquiring stocks that are in trouble (because their yield increased) and it will continue selling stocks that are outperforming (because their yield dropped). I really don't see how this strategy of relying on dividend yield alone can work out in the long run. Like I said about, the fund will be stuck holding a basket of underperforming stocks. Many times stocks are cheap for a good reason, and they have a high yield for a good reason because those companies are not in best shape. Also keep in mind that a lot of the companies that have high yields tend to have high levels of debt such as AT&T ( T ) and some of those more leveraged companies might struggle a lot in the next recession and not be able to pay their debt at all.
Of course, there are risks to my thesis. For example, we could find ourselves in a market situation where investors suddenly feel a very strong urge to bid up high-yielding stocks and this fund could suddenly outperform. We saw how people rushed to buy high yielding energy stocks last year when inflation was raging and energy prices were rising strongly. We could find ourselves in a similar situation and this fund's holdings could outperform, but I find it unlikely to happen anytime soon and even if it happened, it would be rather short-lived.
These days, investors are hungry for yield because they are pressured by high inflation and ever-growing cost of living. This usually pushes them into high yielding stocks and funds which entice them with a nice original yield but end up losing them money in the long run. Investors should look at not only initial yield but also metrics like total returns, dividend growth and share price appreciation potential when picking stocks and funds even if their goal is just to generate income. I would avoid DIV for these reasons and look for better options, two of which I mentioned above. They might have lower yield but they will make you much more money in the long run.
For further details see:
DIV: Not The Best Choice For Income