SDIV: The Crash Has Come, Don't Expect A Rebound

Summary

• Many investors pay too much attention to dividends and too little to where dividends come from.
• The popular Global X SuperDividend ETF invests in the highest dividend yield companies with little due diligence regarding financial health.
• SDIV lost half of its value in March and has yet to make a recovery due to liquidity issues in its holdings.
• The median company in SDIV has an Altman Z-score that signals high bankruptcy risk.
• International REITs may be a safer alternative with an equivalent dividend yield.

Last November, I wrote "SDIV: Borrowing Money To Pay Dividends Is A Recipe For Disaster" which covered many of the issues with investing in companies that pay too much in dividends. In particular, the Global X SuperDividend ETF (NYSEARCA:SDIV) that invests in ultra-high dividend companies.

Since the article was written, the fund has declined by 40%. Unlike others, it remains near March lows and has only seen a slight rebound. While I certainly did not expect the fund to decline to such an extent so quickly, the fact is that SDIV's holdings are extremely fragile. Due to their excessive dividends, most are undercapitalized and/or are in secular decline.

As you can see, the return differential between SDIV and SPY is extreme and was even growing pre-crash:

This is not to say dividends are bad, only that investors often pay too close attention to dividends and not enough to where those dividends come from. If not from operational cash flow, it is merely borrowed money being temporarily deposited into your equity account. When bad times come, those companies will inevitably be forced to dilute shareholders or go bankrupt.

Even more, many companies in a state of distress seem to try to keep their dividends high in order to dissuade investors from seeing their terminal situation (see Boeing (BA) for more on this topic). This causes many high dividend yield companies to have valuations that do not compensate for their risk.

Since I've covered SDIV last, its holdings have changed considerably. Its dividend yield has also risen to 13% which is encouraging investor flows. While there are certainly a few solid value picks in the fund and it looks better than it did in November, it is still best avoided.

An Updated Look at SDIV's Holdings and Exposure

SDIV's strategy is simple, buy

Analyst’s Disclosure:I am/we are short BA. 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.