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This dividend ETF article series aims at evaluating products regarding the relative past performance of their strategies and quality metrics of their current portfolios. As holdings and weights change over time, I post updated reviews when necessary.
DJD strategy and portfolio
The Invesco Dow Jones Industrial Average Dividend ETF (NYSEARCA:DJD) has been tracking the Dow Jones Industrial Average Yield Weighted Index since 12/16/2015. It has 27 holdings, a distribution yield of 2.88%, and one of the cheapest total expense ratios in equity funds: 0.07%.
As described by Invesco in the prospectus,
the Underlying Index is calculated using a yield-weighted methodology that weights all dividend-paying constituents of the Dow Jones Industrial Average™ by their twelve-month dividend yield defined as a stock’s annual dividend (not including any special dividends) divided by its price. The Underlying Index is rebalanced semi-annually (…)
This is reminiscent of the Dogs of the Dow strategy, which consists in buying the ten companies with the highest dividend yields in the Dow Jones Index (DIA). The “Dogs” are the top 10 holdings of DJD (listed below) and they weigh 57.4% of its asset value.
Ticker | Name | Weight% | EPS growth %TTM | P/E TTM | P/E fwd | Yield% |
Chevron Corporation | 9.94 | 183.48 | 23.55 | 14.56 | 4.41 | |
International Business Machines Corporation | 6.68 | -40.20 | 26.13 | 13.75 | 4.75 | |
Verizon Communications Inc. | 6.39 | 20.33 | 10.05 | 9.93 | 4.79 | |
Dow Inc. | 6.11 | 343.69 | 7.57 | 6.57 | 4.79 | |
Walgreens Boots Alliance, Inc. | 5.78 | 493.36 | 18.24 | 10.80 | 3.57 | |
Merck & Co., Inc. | 5.07 | -37.43 | 27.19 | 13.22 | 3.58 | |
Amgen Inc. | 4.72 | -21.72 | 23.48 | 13.51 | 3.41 | |
Coca-Cola Company | 4.59 | 5.40 | 29.66 | 26.29 | 2.79 | |
3M Company | 4.21 | 19.35 | 17.70 | 18.33 | 3.28 | |
Procter & Gamble Company | 3.93 | 4.62 | 29.87 | 27.59 | 2.13 |
Three constituents of DIA are not in DJD because they don’t pay dividends: Boeing (BA), Salesforce (CRM), and Disney (DIS).
The fund is quite concentrated and exposed to risks related to the top names. However, on this point, it is not riskier than DIA, where the top 10 holdings weigh about 55%. Obviously, the top 10 list is different.
The heaviest sector is technology, but the top 3 sectors are almost in equal weight: technology, healthcare, and consumer staples are between 15.7% and 16.6% each. Compared to the parent index, DJD overweights consumer staples, energy, communication, and materials. It underweights technology, financials, industrials, and consumer discretionary. The result is a better balance across sectors:
Chart: author
DJD is cheaper than DIA regarding usual metrics (see ratios in the next table).
DJD | DIA | |
P/E | 15.88 | 19.13 |
P/Book | 3.17 | 4.15 |
P/Sales | 1.57 | 2.52 |
P/Cash Flow | 10.37 | 16.98 |
Data: Fidelity
Performance
Since inception in December 2015, DJD has lagged both the Dow Jones and the S&P 500 (SPY). This period was a strong bull market with a short recession in 2020. It may not be representative of performance in a full market cycle.
Tot. Return | Annual Return | Drawdown | Sharpe ratio | Volatility | |
DJD | 118.81% | 13.85% | -34.66% | 0.88 | 14.22% |
DIA | 138.01% | 15.45% | -36.70% | 0.97 | 15.12% |
SPY | 158.71% | 17.05% | -33.72% | 1.11 | 14.54% |
Data calculated with Portfolio123
The next chart plots the equity value of $100 invested in DJD and DIA since DJD's inception.
Chart: author
DJD was almost on par with DIA until the March 2020 meltdown, then it has underperformed in the recovery.
Comparing DJD with a reference strategy based on dividend and quality
In previous articles, I have shown how three factors may help cut the risk in a dividend portfolio: Return on Assets, Piotroski F-score, and Altman Z-score.
The next table compares DJD since inception with a subset of the S&P 500: stocks with a dividend yield above the average of their respective indexes, an above-average ROA, a good Altman Z-score, and a good Piotroski F-score. It is rebalanced annually to make it comparable with a passive index.
Tot. Return | Annual Return | Drawdown | Sharpe ratio | Volatility | |
DJD | 118.81% | 13.85% | -34.66% | 0.88 | 14.22% |
Dividend quality subset | 144.40% | 15.95% | -34.25% | 0.94 | 15.97% |
Past performance is not a guarantee of future returns. Data Source: Portfolio123
DJD lags the S&P 500 dividend and quality subset. However, DJD performance is real, whereas the subset performance is hypothetical. My core portfolio holds 14 stocks selected in this subset (more info at the end of this post). Some of them are constituents of DJD.
Scanning DJD with quality metrics
DJD holds 27 stocks, with only one risky stock regarding my metrics. In my ETF reviews, risky stocks are companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or dubious Altman Z-score, excluding financials and real estate where these metrics are less relevant. Here, the only risky stock is Verizon (VZ), with red flags for the Altman Z-score (1.4) and the Piotroski F-score (4). It weighs 6.4% of asset value, which is an acceptable risk.
Based on weighted ROA and Piotroski F-score, DJD is similar to DIA in portfolio quality. The Altman Z-score is a bit better.
Altman Z-score | Piotroski F-score | ROA% TTM | |
DJD | 5.24 | 6.48 | 8.32 |
DIA | 4.32 | 6.52 | 8.75 |
Takeaway
DJD is a mega-cap dividend fund holding shares of the 27 companies paying dividends in the Dow Jones index. Constituents are weighted based on dividend yield. Its sector composition is more balanced than the parent index, with the 3 major sectors almost in equal weight: technology, healthcare, and consumer staples. Regarding fundamental metrics, DJD is cheaper than DIA and has a similar quality. It is also cheaper in expense ratio (0.07% vs. 0.16%). It has underperformed the benchmark in the last two years, which may not represent accurately its potential in a full market cycle. DJD has a 3-star rating at Morningstar. In summary, DJD is a good choice for investors attracted to blue chips with a higher yield and a better sector diversification than the Dow Jones index. For transparency, a dividend-oriented part of my equity investments is split between a passive ETF allocation (DJD is not part of it) and my actively managed Stability portfolio (14 stocks), disclosed and updated in Quantitative Risk & Value.
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