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Investment Thesis
iShares Select Dividend ETF (NASDAQ:DVY) warrants a hold rating due to a mix of factors impacting the fund compared to peer dividend-focused ETFs. While DVY has the highest dividend yield and most attractive valuation metrics compared to three other popular dividend funds, it has the lowest performance along with the least diversification. Therefore, although DVY is a solid choice for investors seeking dividend income, there are other dividend-seeking funds that have demonstrated significantly higher capital appreciation with lower expense ratios.
Fund Overview and Compared ETFs
DVY is an ETF that seeks to provide income through exposure to approximately 100 broad-cap U.S. companies with 5-year records of paying dividends. With its inception in 2003, the fund has 99 holdings and $17.90B in AUM. DVY’s heaviest weight by sector is on utilities (25.41%), followed by financials (24.80%) and consumer staples (8.89%).
For comparison purposes, other dividend ETFs examined were SPDR S&P Dividend ETF (SDY), Schwab U.S. Dividend Equity ETF (SCHD), and Vanguard High Dividend Yield ETF (VYM). While there are numerous other dividend-focused ETFs that exist, these funds were selected based on their popularity and high AUM. SDY seeks to track the performance of the S&P High Yield Dividend Aristocrats. The fund looks to include holdings with at least 20 consecutive years of both dividend income and capital appreciation. SCHD seeks to track the return of the Dow Jones U.S. Dividend 100 Index. It focuses on quality and consistency of dividend-producing holdings. SCHD’s largest sector weights are industrials (17.12%), followed by financials (16.73%) and health care (15.90%). Finally, VYM seeks to track the FTSE High Dividend Yield Index.
Performance, Expense Ratio, and Dividend Yield
DVY has a 10-year compound annual growth rate, or CAGR, of 8.83%. This 10-year performance has lagged all compared ETFs. By comparison, SDY has a 10-year CAGR of 9.60%, SCHD has a 10-year CAGR of 11.55%, and VYM has a 10-year CAGR of 9.91%.
10-Year Total Price Return: DVY and Compared Dividend-Focused ETFs (Seeking Alpha)
Another downside for DVY is its relatively high expense ratio. At 0.38%, DVY’s expense ratio is higher than all other dividend-focused funds. The primary advantage for DVY is its strong dividend yield. At 3.92%, DVY has the highest dividend yield compared ETFs. Additionally, DVY’s yield is growing with a 6.96% 5-year CAGR.
Expense Ratio, AUM, and Dividend Yield Comparison
|
DVY |
SDY |
SCHD |
VYM |
|
|
Expense Ratio |
0.38% |
0.35% |
0.06% |
0.06% |
|
AUM |
$17.90B |
$20.10B |
$52.71B |
$63.25B |
|
Dividend Yield TTM |
3.92% |
2.67% |
3.45% |
3.08% |
|
Dividend Growth 5 YR CAGR |
6.96% |
6.20% |
13.05% |
5.59% |
Source: Seeking Alpha, 9 Feb 24
DVY Holdings and Key Differences
Because each of the compared funds have different objectives and tracked indexes, their top holdings are significantly different. DVY is the least diversified fund of the compared ETFs at only 99 holdings. Additionally, DVY’s weight on its top 10 holdings is just under 20%. SCHD, in contrast, has over 40% weight on its top 10 holdings.
Top 10 Holdings for DVY and Compared ETFs
|
DVY – 99 holdings |
SDY – 136 holdings |
SCHD – 104 holdings |
VYM – 449 holdings |
|
IBM – 2.40% |
MMM – 2.24% |
AVGO – 5.03% |
JPM – 3.48% |
|
VZ – 2.37% |
O – 2.11% |
ABBV – 4.69% |
AVGO – 3.41% |
|
MO – 2.28% |
EIX – 1.77% |
MRK – 4.65% |
XOM – 2.87% |
|
OKE – 1.95% |
CVX – 1.75% |
HD – 4.34% |
JNJ – 2.68% |
|
STX – 1.94% |
IBM – 1.75% |
AMGN – 4.11% |
HD – 2.46% |
|
PRU – 1.89% |
ABBV – 1.74% |
CVX – 3.97% |
PG – 2.44% |
|
FNF – 1.82% |
TROW – 1.62% |
VZ – 3.92% |
MRK – 1.96% |
|
T – 1.79% |
XOM – 1.62% |
TXN – 3.88% |
ABBV – 1.94% |
|
LYB – 1.64% |
KMB – 1.61% |
PEP – 3.86% |
CVX – 1.77% |
|
F – 1.61% |
SO – 1.60% |
CSCO – 3.86% |
PEP – 1.66% |
Source: Multiple, compiled by author on 9 Feb 24
All ETF investors know that a fund’s future performance is tied to the return of its individual holdings. Key holdings that represent distinct differences for the ETF are International Business Machines Corporation (IBM), Prudential Financial, Inc. (PRU), Broadcom Inc. (AVGO), and AbbVie Inc. (ABBV). These key differences in holdings are discussed in further detail below.
Advantage #1 – Top Holding of IBM
Despite a lower performance compared to peer funds, DVY has several advantages in its holdings. The first difference is its top holding of IBM. The IT solutions company has demonstrated both solid growth and profitability, including an 11.38% YoY EBITDA growth, 55.45% gross profit margin, and 33.79% return on common equity. Although IBM has a one-year performance of over 35%, it is still favorably valued with a forward P/E ratio of 21.13, 24% below its sector median. IBM is also a strong contributor to DVY’s dividend yield and has demonstrated dividend increases for 28 years. In Q4 2023, IBM saw revenue growth in all its business segments, priming the holding for future returns.
Advantage #2 – Inclusion of PRU
The second advantage for DVY is its inclusion of Prudential Financial. DVY’s weight on this insurance company is 1.89% while SCHD and VYM do not hold PRU. First, Prudential is growing and has seen 270% YoY working capital growth. The company is also favorably valued with a forward P/E ratio 20% below its sector median. Additionally, PRU has seen strong cash flow with $4.78B cash from operations over the past year. During the last quarter, Prudential saw a net profit of $1.32B due to an increase in its assets under management. Therefore, DVY’s holding of Prudential represents another key advantage over peer dividend-focused competitors.
Disadvantage #1 – Lack of AVGO
While DVY has multiple advantages over its peer ETFs, it also has disadvantages. The first key disadvantage is its lack of AVGO as a holding. In contrast, both SCHD and VYM include AVGO as a holding at 5.03% and 3.41%, respectively. AVGO has seen tremendous momentum recently including an 112% increase in share price over the past year. While this has resulted in a P/E and P/B above its sector median, these metrics are roughly on par with AVGO’s own 5-year average. With $14B in cash and equivalents, it is generally expected that AVGO could both increase dividend payments and invest in future technology such as artificial intelligence.
Disadvantage #2 – Lack of ABBV
The second disadvantage for DVY is its lack of ABBV as a holding. Similar to AVGO, both SCHD and VYM include ABBV as a holding at 4.69% and 1.94% weight, respectively. AbbVie is a highly profitable company with a 69% gross profit margin and a 43% levered FCF margin. Despite a one-year price return of over 20%, ABBV’s forward P/E is 17% below its sector median. With strong R&D investment as well as potential acquisitions of ImmunoGen and Cerevel Therapeutics, ABBV represents a strong holding that unfortunately is missing from DVY.
Valuation and Risks to Investors
DVY has a current price of $113.89 at the time of writing this article. This price is roughly in the middle of its 52-week price range of $102.66 to $126.15 and below its all-time high of $131.01 seen back in May 2022. DVY’s one year performance has lagged all dividend ETF competitors at -8.32%.
One-Year Price Return: DVY and Compared Exchange-Traded Funds (Seeking Alpha)
Due to DVY’s recent underperformance as well as the valuation of several of its top holdings, it is relatively undervalued in comparison to peer dividend-focused funds. DVY has the lowest P/E ratio compared to SDY, SCHD, and VYM at just 12.85. Additionally, DVY has the lowest P/B ratio at 1.63. Therefore, while DVY has some disadvantages to SCHD and VYM in its holdings list, the fund is postured to potentially see solid capital appreciation looking forward.
Valuation Metrics for DVY and Peer Competitors
|
DVY |
SDY |
SCHD |
VYM |
|
|
P/E ratio |
12.85 |
17.14 |
16.09 |
16.0 |
|
P/B ratio |
1.63 |
2.83 |
3.60 |
2.5 |
Source: Compiled by Author from Multiple Sources, 9 Feb 24
Because DVY and other compared funds focus on holdings with high dividend yields, the overall volatility of each fund is relatively low. Looking at beta value as a measure of correlation to “the market” overall, DVY’s beta of 0.90 implies lower volatility compared to the market. However, this is the highest beta value compared to peers with VYM at 0.76, SDY at 0.82, and SCHD at 0.79.
Concluding Summary
Investors seeking solely dividend income will be pleased with DVY’s nearly 4% dividend yield. However, there are numerous other factors that must be considered including price return (capital appreciation), expense ratio, and the mix of holdings. When considering all of these factors holistically, DVY warrants a hold for me. I prefer SCHD, or potentially VYM, for a better balance between both dividend yield and capital appreciation as well as low expense ratio. Finally, when examining the holdings of each fund, DVY has both advantages and disadvantages over these other top dividend-yielding funds.
