2023-07-07 09:24:19 ET
Summary
- This article will pit DJD against a self-indexing even weighted "Dogs of the Dow" strategy and SCHD for reference.
- We will backtest returns for all three since the inception of DJD.
- Self-indexing the Dogs of The Dow looks like a superior strategy over DJD. SCHD still turns out to be the best dividend ETF I've seen after digging into all three strategies.
Headline
For those that follow me, many know I'm a habitual "self-indexer". As someone who likes to replicate certain indexes rather than plunk my funds in ETFs, The Invesco Dow Jones Industrial Average Dividend ETF ( DJD ) piques my interest. It has low fees at a .07% expense ratio and a large dividend, in excess of its rival, the Schwab U.S. Dividend Equity ETF ( SCHD ). However, this fund strategy seems too easy to replicate. 27 Stocks with over 55.8% allocated to the Dogs of The Dow, or the 10 stocks with the highest yield in the Dow.
Let's take a look at this fund strategy competition. My analysis still implies that SCHD remains the premium play when buying a dividend ETF. Self-indexing the Dogs of The Dow also looks like a superior strategy over DJD.
DJD holdings
SeekingAlpha
The top 10 DJD holdings, as we'll see below, are the Dogs of the Dow. The weighting versus the strategy of buying the stocks yourself may be different, but the over complication may be entirely unnecessary.
Dogs of the Dow
First off, let's look at a simple, even weighted Dogs of the Dow strategy with the current DJIA dividend leaders.
Below is an example and weighted average for just the Dogs of The Dow dividend yields and growth:
Stock Dividend Growth
Verizon ( VZ ) | 7.02% | 2.04% |
Dow ( DOW ) | 5.26% | 0 |
Coca-Cola ( KO ) | 3.06% | 3.44% |
Walgreens Boots Alliance ( WBA ) | 6.74% | 3.71% |
3M ( MMM ) | 5.99% | 3.36% |
IBM ( IBM ) | 4.96% | 2.66% |
Amgen ( AMGN ) | 3.84% | 10.5% |
Cisco ( CSCO ) | 3.02% | 4.98% |
Chevron ( CVX ) | 3.84% | 5.9% |
Johnson & Johnson ( JNJ ) | 2.88% | 6.02% |
Since the Dogs of the Dow strategy is typically even weighted , the weighting of the dividends and growth rates are quite simple and an average across all 10. I have determined the data for both the current yield and 5-year average growth below:
Average Yield | 4.66% |
Average Growth | 4.26% |
DJD dividend and growth
SeekingAlpha
The 3 and 5-year CAGR in dividend growth rate appear to be superior to self-indexing the Dogs of The Dow, however, the yield is more than a percent lower. As the constituents of this ETF and primary dividend payment source come from this Dog, overweighted segment, I can't see how the growth rate could exceed the Dogs of the Dow to such a great extent. I would imagine over time the growth rates would be closer to even.
Dogs of the Dow vs DJD head-to-head
2016 Dogs even weighted:
The first battle, we will be pitting DJD versus the self-indexing strategy of the Dogs of The Dow, even weighted. Since DJD has been around since 2016, this is the backtest period [2016-2023] we will use. Here we are just sticking with our 2016 Dogs of The Dow constituents all the way through.
www.portfoliovisualizer.com
Head-to-head
The Dogs portfolio vs DJD growth rates listed below is only price versus a total return. The backtest did not incorporate dividends, which should have been a higher yield for the self-index strategy, but possibly a lower growth rate than DJD if we are referring to current yield growth statistics. The self-index strategy would also have more compounding periods. Both the annual rebalanced and non-rebalanced portfolios performed about the same against DJD in terms of price return.
www.portfoliovisualizer.com
Stats
The CAGR over the period was about 3% higher for the self-indexing strategy. This is fairly significant, being that the dividends are not included in the growth rate. The Sharpe ratios were also very close, so you would not have been sweating too many extra bullets during this 7-year ride with only 10 stocks versus a 27-30 stock ETF.
www.portfoliovisualizer.com
Compared to SCHD
Then we have the granddaddy dividend ETF, SCHD. The Schwab U.S. Dividend Equity ETF performed significantly better on a total return basis during this same period. This is also a very difficult dividend ETF to emulate as it's based on the Dow Jones U.S. Dividend 100 Index with 100 holdings changing by a more complex system of dividend quality analysis.
SCHD Holdings
SeekingAlpha
As you can see, the top 40% of holdings are comprised of a wide variety of constituents that do not mimic the DJIA 30 or the S&P 500. What I love about this fund is that the holdings are rooted in logic and not based on what's most out of favor with higher yields. This fund considers yield, growth, and quality.
Which to choose
If you are a dividend orientated investor with a long holding period, SCHD would be my clear choice over DJD.
Dogs of the Dow Vs. SCHD
portfoliovisualizer
These two strategies, when compared over the same time period as the backtest with DJD, reveals an almost equivalent matching. Again, this is not on a total return basis, only a price return basis. This test was run with monthly rebalancing. The statistic results are below.
portfoliovisualizer
Total return self-indexing the Dogs of the Dow
Since each constituent is even weighted in this assumption, we can take one tenth of each total return and sum up our average to get a rough estimate total return of the portfolio. The average total return in this scenario is 106%! This is an odd phenomena as the total return estimate would be equal to DJD exactly. Total return wise, SCHD seems to have a clear edge in this time period over both DJD and self-indexing the Dogs.
Risks
All of these strategies are more or less passive. With anything comes risk, especially in the short run. Any of these three dividend investment strategies should produce very satisfactory, positive returns over the long run. However, with anything, past performance is not indicative of future results. We're getting close to the previous all-time high peaks. The broader market could sell off for profit taking purposes with the most minor of excuses.
Summary
DJD is not a very compelling ETF to me. It can be easily matched or trounced by buying the 10 top-yielding DJIA 30 stocks yourself. While the return is superior when you rebalance to an equal weighting at the end of the year, it appeared even a "set it and forget it" 10 stock buy and hold still outperformed DJD when buying that slice of the DJIA yourself.
SCHD appears to be a superior return out of the three strategies. However, owning stocks yourself also allows you to take gains or losses as you like, rebalance in your own value orientation and obtaining more compounding periods. DJD is a fine hold if you have it, but I would choose to buy the top 10 DJIA yielding stocks myself versus that strategy, also avoiding any fees, even if minimal. It would be a very simple portfolio to manage. DJD is an old concept repackaged as something novel.
For further details see:
DJD Vs. Dogs Of The Dow