DIV: High Yield Does Not Translate To Good Total Return

|
About: Global X Super Dividend U.S. ETF (DIV), Includes: DGRW, VYM
by: Ploutos Investing
Summary

DIV invests in 50 of the highest-yielding stocks in the U.S.

The fund's selection criteria have resulted in lower quality companies.

DIV pays a 7.6%-yielding dividend but its total performance lags other dividend ETFs that focus on quality and growth.

ETF Overview

Global X Super Dividend ETF (DIV) focuses on 50 of the highest-yielding stocks in the U.S. However, DIV's selection methodology has resulted in high-yielding but lower-quality companies. Therefore, its performance tends to lag other quality dividend ETFs in the long term. Therefore, we recommend investors seek other opportunities.

Chart

Data by YCharts

Fund Analysis

Portfolio construction ensures high dividend yields but may include lower-quality companies

DIV constructs its portfolio by picking the 50 highest yielding stocks in the U.S. that has both consistently pay its dividend in the past two years and have relative lower volatility. These 50 stocks are equally weighted to prevent overexposure to one single stock. The problem with this method is that it relies on two backward-looking metrics. Here, we will explain why.

First, DIV's criteria of consistently paying dividends for the past two years do not screen out stocks that might have future dividend cuts. As we know, high-yield stocks are often stocks that pay a large portion of its earnings to shareholders as dividends. Hence, its payout ratio is generally high, and any headwinds can result in a potential dividend cut. In addition, high-yield stocks tend to be stocks that have low share prices due to market's concern about its negative business outlook or perhaps a deteriorating balance sheet. Hence, DIV's portfolio of stocks may contain lower-quality stocks.

Second, DIV's emphasis on low volatility may result in stocks that ended up having lower growth momentum. In fact, stocks in DIV's portfolio generally have lower growth outlook than other dividend ETFs that focuses on growth. We will discuss about this part later in the article.

DIV has a high exposure to small-cap stocks

Unlike many other dividend ETFs, DIV's portfolio construction methods do not screen out small- and mid-cap stocks. As can be seen from the table below, small-cap stocks represent 59.13% of DIV's portfolio. Unlike large-cap stocks that generally have an established business and much stronger balance sheets, small-cap stocks may be more fragile in an economic downturn. An economic downturn may quickly result in negative earnings growth. Therefore, in a market downturn, DIV will likely exhibit higher volatility (despite its strategy to select lower volatility stocks) than many other dividend ETFs that are mostly exposed to large-cap stocks.

Source: Morningstar

High exposure to cyclical sectors

DIV has a high exposure to cyclical sectors. These sectors include mortgage REITs, consumer discretionary, industrials, materials, and energy sectors. These sectors made up nearly 44% of DIV's portfolio.

Source: DIV Factsheet

As we know, cyclical sectors can perform quite well when the global economy is booming. However, it can perform poorly when the economy is contracting. The uncertainty surrounding the global trade tensions lately have reduced business confidences considerably. This is already evident in the U.S. ISM Manufacturing PMI, a leading economic indicator, where it has fallen from nearly 61 in early 2018 to 51.2 in July 2019. Therefore, DIV may not perform well in the next few quarters unless we see a sign of reversal of the U.S. ISM Manufacturing PMI.

US ISM Manufacturing PMI (Source: Trading Economics)

Investors may want to consider other dividend yield ETFs

Below is a table that compares the valuation of DIV to other dividend stocks such as Vanguard High Dividend ETF (VYM), WisdomTree US Quality Dividend Grade ETF (DGRW), and the S&P 500 Index. For reader's information, DGRW includes stocks that are tilted towards dividend growth. On the other hand, VYM includes stocks that are tilted towards value.

DIV

VYM

DGRW

S&P 500 Index

Forward P/E Ratio

13.80x

14.25x

16.25x

18.20x

Dividend Yield (%)

7.61%

3.18%

2.38%

1.92%

Sales Growth (%)

3.89%

4.42%

7.05%

7.12%

Cash Flow Growth (%)

-4.90%

8.76%

14.40%

13.33%

Source: Morningstar, Created by author

Given DIV's focus on yield, it is not surprising that it has the highest dividend yield than other ETFs and index in the table above. However, DIV's average sales growth rate of 3.89% is the lowest among the group. VYM and DGRW have sales growth rates of 4.42% and 7.05%, respectively. DIV even has negative cash flow growth rate of 4.90%. This is a sharp contrast to VYM's positive growth rate of 8.76% and DGRW's 14.40%. This tells us that the growth outlook of DIV's portfolio is inferior than VYM and DGRW.

As can be seen from the chart below, DIV only generated a total return of 27.31% since its inception in 2013. This is significantly behind VYM's 79.48%, DGRW's 94.30%, and S&P 500 Index's 95.29%.

Chart

Data by YCharts

Investor Takeaway

We see little reason to own DIV as its approach to construct the portfolio of stocks may simply result in low return. Although its average yield is high, its total return is inferior than many of its peers. We think investors are better off seeking opportunities elsewhere or invest in better quality dividend ETFs such as VYM of DGRW.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.