TDVG: Active Dividend Growth Without Much Dividend Yield

Monty Rakusen This remains an incredibly unbalanced market as of writing, as breadth deteriorates against a select number of stocks that are driving the capital appreciation of mega-cap indices. At some point, this narrowness will end, and I believe it does so sooner than later. The pendulum will inevitably shift towards undervalued stocks which have a history of increasing their dividends, where that becomes a bigger driver of total returns than momentum. And if that’s the case, you may want to consider the T. Rowe Price Dividend Growth ETF (NYSEARCA:TDVG). This actively managed exchange-traded fund takes shares in large and mid-sized US companies that pay a reliable and growing dividend. A Look At The Holdings The holdings here reflect how T. Rowe’s in-house research team filters for stocks that have above-average dividends and earnings growth, while keeping an eye towards undervalued opportunities. We know from a lot of studies that stock picking is particularly difficult to generate sustained outperformance from. That’s not to say that you can’t have a more robust mix of stocks to enhance overall diversification. To that end, I like the way the top 10 is structured here. Microsoft makes up the latest allocation at 6.7%, followed by Apple and Visa. This list alone looks very different than what you see in most passive benchmarks. troweprice.com Sector Composition The sector holdings are also diversified, limiting concentration risk and broadly exposing the fund. I’m broadly negative on Tech given how outsized the return has been in the past year relative to all other sectors, but it’s not a bad allocation at 22.47% at the top. I very much like that Healthcare in the second-largest sector weighting, as it balances out against the Tech exposure. Healthcare stocks in the portfolio, given their dividend history, likely provide a nice ballast against the more aggressive high-flying tech stocks that have driven markets higher this year. ycharts.com Peer Comparison Although TDVG competes with many other ETFs, its actively managed status and singular focus on dividend growth makes it different from many of its main rivals. One fund worth comparing this against is the passive Vanguard Dividend Appreciation ETF (VIG). Its underlying NASDAQ US Dividend Achievers Select Index is a basket of companies that have increased their dividends for at least 10 consecutive years. When we look at the price ratio of TDVG relative to VIG, we find no clear performance edge. TDVG has performed in line with VIG over the past two years. This goes back to my point that active stock picking is hard to generate consistent excess returns from. stockcharts.com Pros and Cons On the positive side, TDVG gives investors access to a well-diversified, high-quality set of dividend-growth companies, with a long track record of consistency. The fund’s active management allows it to make tactical adjustments to its underlying portfolio, which can help maximize returns and minimize risk. TDVG’s focus on income generation together with capital appreciation makes the fund suitable for investors who believe in a balanced approach to investing. Having said that, and this is important, the yield actually isn’t that impressive. It stands at just 1.24% according to YCharts. ycharts.com So while it’s designed to generate income and yield, the reality is there are higher dividend paying funds out there. And as is usually the case with active funds, TDVG incurs a higher expense ratio than those of many passive index-tracking ETFs, currently at 0.50%. The active management approach further means that the performance of the fund can deviate from its reference benchmark. Conclusion I have mixed feelings on this one. I like the top 10 composition, like the sector allocation, and like the focus on dividend growth. I don’t like the yield being where it is though, given that the name of the fund makes it seem like it should have higher, well, dividends. There’s nothing fundamentally wrong with the strategy that I can see – I just don’t know if it stands out enough against passive funds doing the same thing with potentially more yield.Anticipate Crashes, Corrections, and Bear MarketsAre you tired of being a passive investor and ready to take control of your financial future? Introducing The Lead-Lag Report, an award-winning research tool designed to give you a competitive edge.The Lead-Lag Report is your daily source for identifying risk triggers, uncovering high yield ideas, and gaining valuable macro observations. Stay ahead of the game with crucial insights into leaders, laggards, and everything in between.Go from risk-on to risk-off with ease and confidence. Subscribe to The Lead-Lag Report today.Click here to gain access and try the Lead-Lag Report FREE for 14 days.

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