The Invesco Dow Jones Industrial Average Dividend ETF (NYSEARCA:DJD) has managed to squeak out a 0.76% gain so far this year, outperforming the SPDR S&P 500 ETF (SPY) by nearly 14%. I wrote in February about how good of a bargain it was, but market forces mean securities rarely remain on sale for long. Therefore, today’s article aims to challenge my February thesis and determine if shareholders should take their winnings and move them to a more diversified fund or if it’s worth hanging on for even greater profits.
Strategy and Fund Basics
DJD holds the dividend-paying securities in the Dow Jones Industrial Average, one of the most widely-used barometers for U.S. blue chips (except for transportation and utility stocks). Only three of 30 companies in the DJIA are excluded: salesforce.com (CRM), Boeing (BA), and The Walt Disney Company (DIS), but securities are weighted based on trailing twelve-month yield instead of price. This feature gives DJD a decidedly defensive lean, meaning investors can expect outperformance in risk-off environments like we have today. Below are some additional descriptive statistics for the fund.
- Current Price: $44.70
- Assets Under Management: $187 million
- Expense Ratio: 0.07%
- Launch Date: December 16, 2015
- Trailing Dividend Yield: 2.88%
- Three-Year Dividend CAGR: 20.70%
- Five-Year Dividend CAGR: 8.63%
- Dividend Payout Frequency: Quarterly
- Five-Year Beta: 0.86
- Number of Securities: 27
- Portfolio Turnover: 50.00% (3%, 19%, 20%, 14% From 2017-2020)
- Assets in Top Ten: 57.45%
- 30-Day Median Bid-Ask Spread: 0.17%
- Tracked Index: Dow Jones Industrial Average Yield Weighted Index
- Index Reconstitution Frequency: Semi-Annually in March and September
- Weighting Scheme: Trailing 12-Month Dividend Yield
Like the DJIA, DJD is a concentrated fund with 57.45% of assets in the top ten, but it doesn’t overlap much across industries, so you should get some risk-reducing benefits.
Sector Exposures & Top Holdings
Compared to the SPDR Dow Jones Industrial Average ETF (DIA), DJD overweights Consumer Staples (7.40%) and Materials (5.94%) and underweights Consumer Discretionary (5.44%), Financials (4.64%), and Health Care (3.83%). However, Technology remains its most significant exposure area, with 18.43% spread across six companies.
DJD has a lot of similarities with the Schwab U.S. Dividend Equity ETF (SCHD). Many sector exposure areas are nearly identical, but DJD underweights Financials by almost 9%. As a result, DJD’s five-year beta is now just 0.82 since stocks in this sector tend to be more volatile.
The ETF’s top ten holdings are shown below, totaling 57.42%. I’m not too fond of stocks like International Business Machines (IBM) and Verizon Communications (VZ) due to their limited growth potential. Still, there are enough growth offsets to ensure participation in a bull market. These stocks include Dow (DOW) and Chevron (CVX) and are excellent hedges against inflation should that theme continue. I should mention that Chevron’s weighting was 11.54% in February, so the rebalancing did take some inflation protection off the table.
Using broad-market funds like DIA and the SPY as a benchmark, DJD has held its own, delivering an annualized return of 12.29% since it launched in December 2015, compared with 12.77% for DIA and 13.55% for SPY. This underperformance occurred in 2020, when market sentiment was irrationally high. DJD was flat while SPY gained 18%, but a partial reversal has happened so far in 2022.
Against Other Dividend ETFs
I track 65 dividend ETFs, but not all are substitutes for DJD. In my view, the best comparators are less volatile than the market, have relatively low valuations, and yield around 3% or more. I found 20 that meet these criteria, and their periodic performances alongside DIA and SPY are below and sorted by one-year returns through April 2022.
DJD has done well lately, outperforming SPY and DIA by 7.44% and 5.01% in the three months from February to April, and has extended its lead so far in May by an additional 1.50%. Still, it’s lagged behind ETFs paying higher dividends. As cheap as DJD is from a valuation perspective, there are cheaper options. They just lack the growth potential, so that was a key reason for my February bullish rating: good valuation, great growth, low volatility, and of course, a nice dividend yield. It’s all about finding the right balance in uncertain markets.
DJD’s trailing dividend yield was as low as 2.20% in March 2018 to as high as 4.30% in March 2020 when the pandemic pushed asset prices down. The median yield is 2.81%, which is around what it is today. Dividend growth, while not linear, is positive over time. Compared to five years ago, DJD’s 1.2891 annual distribution is 51.24% higher, or 8.26% annualized. This figure is slightly lower than the 8.63% reported because of the small short- and long-term capital gains distributions paid in 2017.
DJD weights by yield and rebalances semi-annually, ensuring a relatively high yield. I also believe DJD is likely to continue growing dividends by around 8% per year. Below are some dividend-related statistics on DJD’s top 20 holdings and important growth and valuation metrics compared to DIA and SCHD.
DJD’s gross yield is 3.23%, and after deducting 0.07% in expenses, investors are likely to receive above an annualized 3% distribution next quarter. Historically, constituents have grown dividends at a 7.66% rate in the last five years, consistent with the fund’s metrics. Net dividend payout ratios are only 42.99%, so that’s not a concern. A few companies like IBM, Coca-Cola (KO), and Procter & Gamble (PG) have elevated payout ratios, but they’re also Dividend Aristocrats. Barring any enormous economic disaster, the dividends should continue.
This table highlights some key reasons why DJD has outperformed DIA by about 10% this year. DJD’s beta is lower (0.82 vs. 0.91), its constituents had a better earnings season, as evidenced by their last quarter’s revenue surprise figure (2.49% vs. 2.07%), and it continues to trade at a discount as measured by its weighted-average forward price-earnings ratio (15.09 vs. 19.30).
However, SCHD is looking like a solid alternative right now. Its forward P/E is about the same as DJD (15.38 vs. 15.09), as is estimated revenue and earnings per share growth. SCHD’s beta is higher, but that will be beneficial if markets are close to bottoming. Finally, SCHD’s five-year dividend growth history is robust (12.89% vs. 7.66%), and it has a higher yield. In short, DJD’s advantages were clear in February. Now, not so much.
Fundamentals Relative To February
When an ETF significantly outperforms a benchmark, the opportunity becomes less compelling. A way to show this is by performing a “then-and-now” comparison of DJD’s and DIA’s fundamentals. I’ve bolded some of the more significant changes.
A few quick observations:
1. One-year forward revenue and EBITDA growth dropped for both funds, but at a quicker pace for DJD. DIA now has a 2.50% advantage on both metrics.
2. DJD’s forward price-earnings ratio decreased from 16.06 to 15.09, reflecting how well it’s held up lately. However, DIA’s price-earnings ratio fell by nearly four points from 23.22 to 19.30. Similar decreases are seen in trailing price-cash flow and trailing price-sales.
3. The price position in range figure represents a fund’s weighted-average price relative to its 52-week high and low prices on a scale of 0-100%. Today, DJD’s constituents’ position is 45.25% compared to 58.58% in February, or a 13.33% drop. However, DIA’s constituents experienced an 18.51% drop. One reason is that the three stocks DJD excludes (CRM, BA, and DIS) are all trading near their 52-week lows. DIA seems better positioned to capitalize if markets are at or near their bottoms.
4. The quarterly revenue surprise figures suggest DIA had a better quarter due to its allocation differences. In addition, analysts upgraded earnings estimates for DIA but did not for DJD, as indicated by Seeking Alpha’s EPS Revision scores. I consider these measures of sentiment that suggest DJD’s days of outperformance may be coming to an end.
DJD shareholders should collect at least a 3% annualized yield this quarter, and if held for the long run, dividends should grow an average of around 8% per year. Its five-year beta of 0.82 also suggests some downside protection should markets decline further. However, DJD isn’t the bargain it was in February. Compared with DIA, it trades four points less on forward earnings but has less estimated growth to at least partially account for this discount. DIA also had a better quarter, and analysts are more optimistic about earnings. As for SCHD, it trades for the same valuation as DIA but has a better performance history, yield, and dividend growth metrics to support initiating a long position. That’s the route I recommend today. DJD had a great run, but everything must eventually come to an end. Thank you for reading, and I look forward to discussing this further in the comments section below.