2023-04-26 03:15:37 ET
Summary
- SPDV's dividend yield is now close to 4% after undergoing a semi-annual reconstitution at the end of January. The fund's poor performance YTD could indicate a buying opportunity.
- However, SPDV's free-cash-flow-yield approach, applied equally to all 11 GICS sectors, has yet to prove itself. Current holdings are mostly deep-value plays with little expected earnings growth.
- There's no free lunch in investing. Don't expect dividend growth with sales and earnings growth to back it up. SPDV is an income-only play.
- It's possible SPDV will turn it around, given how its earnings revision score is in line with other leading dividend ETFs like VYM, DGRO, and SDY. However, don't expect anything spectacular.
Investment Thesis
In January, I recommended investors avoid the AAM S&P 500 High Dividend Value ETF ( SPDV ) because of its over-reliance on the Energy sector, poor quality compared to lower-cost alternatives, and low growth potential. Three months later, SPDV has underperformed the SPDR S&P 500 Trust ETF ( SPY ) by approximately 11% and is one of the worst-performing dividend ETFs on the market. Based on these poor returns, I want to see if there's a value opportunity worth pursuing.
Anything is possible, but it's not probable if SPDV's short history is any guide. From 2018-2022, SPDV's performance ranked in the second quartile twice, the third quartile once, and the fourth quartile twice, not including 2023. Furthermore, SPDV's current fundamentals indicate it's still too risky. I urge readers not to be fooled by a yield that now pushes 4%, but instead, place more weight on metrics like other metrics like low earnings and dividend growth rates and a relatively weak profitability score. In short, my January thesis is unchanged. SPDV might turn it around, but it's not worth the risk.
SPDV Overview
Strategy and Top Ten Holdings
SPDV tracks the S&P Dividend and Free Cash Flow Yield Index. The Index follows an equal-weight-by-sector approach and selects five companies from each GICS sector to complete a 55-stock fund. The Index rebalances semi-annually at the end of January and July, with its selection rules listed below.
This approach favors growth-oriented sectors like Consumer Discretionary and Technology that might not qualify for what would generally be a very cheaply-valued fund. Several funds, like COWZ and CALF from Pacer ETFs, take a similar approach. These ETFs have different sector constraints, resulting in a portfolio combining high growth and low valuation. The downside is excessive volatility and concentration. SPDV mitigates these issues somewhat, but it's still a more volatile portfolio than other dividend ETFs.
Excessive volatility and concentration can sometimes work in your favor. For example, COWZ held many commodity-related stocks throughout 2022, perfect for high inflationary periods. It outperformed SPDV by 3% that year and the SPY by 18%. Therefore, I don't want to turn you away from the free cash flow yield method simply because of the added risk. Instead, I want to highlight it because some investors, particularly those focused on dividends, try to avoid it.
SPDV's top ten holdings are listed below, including Molson Coors Beverage ( TAP ), AbbVie ( ABBV ), and Snap-on ( SNA ). The average weight of the portfolio's securities is 1.82%, so these merely represent the best performers since the Index last rebalanced. I will highlight the top 25 in the fundamental analysis section later.
Performance Analysis
The following table highlights how SPDV performed against 23 diversified peers currently yielding 3.50% or better. I've sorted the table by five-year returns to include most of SPDV's history (it launched in November 2017).
SPDV's 28.34% five-year return through March 2023 was the fourth-worst in the sample. Its 12.71% trailing six-month ranked only #12/24, so its track record is between poor and average. There's little evidence the strategy works, and SPDV doesn't reduce risk like better-performing funds like the Schwab U.S. Dividend Equity ETF ( SCHD ). As seen below, SPDV's annualized volatility was 20.56% vs. 17.46% for SCHD. It also had a more significant Q1 2020 drawdown (32.93% vs. 21.54%), a key contributor to its poor Sharpe Ratio.
For my latest analysis on SCHD , I calculated quartile rankings for 79 U.S. dividend and value-focused ETFs. SPDV ranked in the second quartile twice (2021, 2022), the third quartile once (2018), and the fourth quartile twice (2019, 2020). Its lack of a standout year is unusual, and investors should be skeptical until it proves itself. By March 2023, 86% of peers outperformed SPDV, so it's not great for a fund with just $74 million in AUM. The ETF Database reports just $4 million in fund flows YTD vs. SCHD's $3.81 billion.
Dividends
SPDV has a slightly higher starting yield than SCHD, but its dividend growth is poor. The following graph highlights the annual portfolio income for the two funds based on a $10,000 investment. Assuming you did not reinvest dividends, SPDV generated $329 in 2018 vs. $281 for SCHD. However, SPDV's income grew to only $365 in 2022 vs. SCHD's $501. SPDV's annualized growth rate was just 2.63%.
This low growth rate differs from what's listed on SPDV's Dividend Page. The calculation is misleading because six years of history is required to calculate a five-year growth rate. SPDV has only five and a half. The grade should go down as we approach the end of the year.
A lack of dividend growth is often a problem for high-yield ETFs. Ideally, dividend growth happens because of strong sales and earnings growth, so let's look at SPDV's fundamentals to see what we can expect going forward.
SPDV Fundamentals
The following table highlights selected fundamental metrics for SPDV's top 25 holdings. Its gross estimated dividend yield is 4.23%, and after subtracting SPDV's 0.29% expense ratio, investors can expect to yield 3.94%.
A few observations:
1. SPDV's Index reconstituted since my last review, resulting in 12 substitutions, or 22% of the portfolio. The biggest change was in the Financials sector, with Lincoln National ( LNC ), Truist Financial ( TFC ), and U.S. Bancorp ( USB ) joining the Index. The deletions were Citigroup ( C ), Huntington Bancshares ( HBAN ), and Principal Financial ( PFG ). Here is how the six have performed since the changes took effect in February.
These changes were unfavorable, with many smaller stocks in the sector declining as Silicon Valley Bank collapsed. The added stocks averaged a 35.65% loss compared to 15.59% for the deletions.
2. The portfolio's five-year beta is 1.04, up slightly from January's 1.03. As discussed, the equal-weight-by-sector approach results in a lower beta than other funds following a free cash-flow-yield process, but it's still more volatile than SCHD and other dividend ETFs.
3. SPDV trades at an attractive 13.63x forward earnings, 2.5 points cheaper than SCHD. However, growth rates plummeted. In January, SPDV's estimated sales growth rate was 7.42%. Today, it's just 2.69%. Earnings growth is effectively flat, so any significant dividend growth is not supported. It's purely an income play, though its 3.94% net expected yield is similar to SCHD's 3.60% (3.66% gross).
4. SCHD is a low bar for growth, too. Compared with VTV , VIG , VYM , DGRO , and SDY , it has the lowest sales, EBITDA, and EPS growth rates.
5. SPDV's future dividend growth is further limited by a relatively poor 8.59/10 Profitability Score. Its constituents have demonstrated as much willingness to increase dividends quickly either, evidenced by a 6.06% five-year dividend growth rate. That figure, boosted by NRG Energy's 64.09% growth rate, is still well below SCHD's 11.38%.
6. The silver lining is SPDV's 5.42/10 EPS Revisions Score, indicating better earnings momentum than SCHD. However, as with growth rates, SCHD's score could be better. The dividend ETFs above feature the same or better scores.
Investment Recommendation
SPDV has yet to demonstrate the capability of delivering first-quartile performance among my comparator group of 78 dividend ETFs. Furthermore, SPDV's total returns ranked fourth-worst among dividend ETFs yielding 3.50% or more, and its estimated 3.94% dividend yield is the only draw worth highlighting. There are too many risks, including low-single-digit growth rates, relatively poor profitability, and an above-average beta that won't provide the downside protection high-dividend investors typically seek. Therefore, I don't see a buying opportunity yet, and I recommend that investors avoid SPDV.
For further details see:
SPDV: Now Yielding 4%, Is This Dividend ETF Worth Buying?