DVY: Still A Solid Dividend Option (NASDAQ:DVY)

PM Images Main Thesis & Background The purpose of this article is to evaluate the iShares Select Dividend ETF (NASDAQ:NASDAQ:DVY) as an investment option at its current market price. The strategy of this fund is “to track the investment results of an index composed of relatively high dividend-paying U.S. equities”. DVY is a fund I have written about (and owned) for a very long time – really since my investment career began. I started out with a focus on dividends and while I have shifted to a more growth-oriented mindset over time, dividend-focused funds still form a foundation for my portfolio. In fact, when Q4 was getting underway last year, I continued to recommend DVY as a strong ETF to own. Looking back, it hasn’t kept pace with the Tech-heavy S&P 500, but it has produced a solid return nonetheless: Fund Performance (Seeking Alpha)As we move into the second half of 2024, I think the same story is going to play out. Is DVY a “get rich quick” type of fund? No. Will it beat the Mag 7 in the months ahead? Maybe not. But it should continue to post gains and provide reliable dividend income, and that is a win in my book. As long as readers understand what this fund is and what it is going to do for them, it could serve the right investor well going forward. For this reason, I am maintaining a “buy” rating on the fund, and will explain in detail below. June Dividend Increase Was Impressive As mentioned, DVY is primarily intended for those with a dividend-focus. That suits me just fine, but it may not be for everyone. Still, just having “dividend” in the name can mean a lot of different things. What I like to see is a reasonable yield, but also strong distribution growth over time. That helps keep up with inflation and also gives me confidence in the performance of the underlying companies in the portfolio. After all, if they are having trouble growing (or maintaining) their dividends, are these really the companies I want to to own? The answer is usually no. The good news is that DVY checks the box here. In my September article I noted that DVY’s dividend growth had been modest of late but that I expected it to improve going forward. Well, improve it did, with June’s payout getting a next boost on a year-over-year basis: June 2023 Dividend June 2024 Dividend YOY Growth $.82/share $.93/share 13% Click to enlarge Source: iShares For me this is definitely a reason for a continued bull outlook on the fund. DVY’s yield is near the 4% mark and its payout is growing strongly. Hard not to appreciate that as a “dividend seeker”. Diversification Benefit As Important As Ever Another reason for considering upping my exposure to DVY has to do with the broader market backdrop. What I mean is that the Mag 7 (and other large-cap Tech stocks) that continue to dominate the market are starting to make the price of owning passive “market” ETFs quite pricey. This is because many popular funds like the Vanguard S&P 500 ETF (VOO), the Invesco QQQ (QQQ) ETF, or the Schwab US Large-Cap ETF (SCHX) have been concentrated at the top by these same high-flying stocks for some time. While this has been “good” for owners of those stocks or funds, the prospect of similar returns in the second half of the year is getting to be slim in my view. A big part of the reason why I feel this way has to do with valuation. The S&P 500 – the primary benchmark for developed market equities – is pushing elevated P/E levels compared to its own trading history. Has it traded higher in the past? Absolutely. But we can see the current level is above the normal, long-term range for this particular index: Forward P/E (S&P 500) (FactSet)Now this doesn’t mean I am making a bearish call on large-cap US stocks. In fact, I remain bullish on them and I am long both VOO and QQQ which I mentioned above. I hope they continue to do well and if they beat the market (or DVY) I will be fine with that outcome. But what I am suggesting here is this is the type of environment where diversification is important. Can large-cap Tech stocks lead in the second half of the year? Sure they can, and DVY will under-perform if they do. But it is also the case that the S&P 500 and the NASDAQ 100 are getting pricey to own. It is simply my prudent nature to see these types of metrics and get a bit more cautious and diverse with my positioning. Upping my stake in DVY is one such way to do that because it is top-heavy with Financial and Utilities stocks: DVY)” contenteditable=”false” loading=”lazy”>Sector Weightings (DVY) (iShares)In this view I believe it helps to balance out a portfolio. It has in the past and I believe it will in the future. Utility Sector Has Seen A Nice Pullback Honing in on DVY, I mentioned above how this ETF is heavy with Utilities exposure. This was paramount to why I bought the fund in the first place years ago and it continues to offer value at the present moment. One reason I feel that way is that while the S&P 500 keeps on notching record highs, the Utilities sector has seen some weakness in the short-term. This divergence in performance offers up a bit of a relative value buying opportunity in my opinion: 1-Month Performance (VPU, BUI, S&P 500) (Google Finance)As you can see, both the Vanguard Utilities ETF (VPU) and the BlackRock Utilities, Infrastructure, & Power Opportunities Trust (BUI) – two Utility-focused funds that I personally own – have seen a negative move over the last month while the S&P 500 index has pushed higher. What this tells me is that while some of the more popular indices (namely the S&P 500) keep on pushing the valuation metric higher and higher, Utilities are trading at a more modest range and price. This is typical of the sector but also offers investors a way to amplify their equity exposure without getting carried away with such lofty valuations. Of course, just being “down” while the S&P 500 is up over a one-month period does not in and of itself suggest value. Yes, I like to buy pullbacks in most major sectors, but that isn’t the only bull case here. When I look at historical averages, the opening graphic showed the S&P 500 trading above its norm. By contrast, the Utilities sector is near the bottom of its historical range: Current P/E – Utilities Sector (Voya Financial)Add this all up and I see value here. This supports my “buy” call on DVY because the fund is top-heavy with a sector that I see long-term potential in and that is also trading at a sharp discount to the broader market and its own P/E median price. This is a win-win for me. The US Is Still A Great Place To Be Another factor on why I’m still bullish here has to do with the macro-picture on the world stage. I continue to see merit in being a selective buyer overseas, but the fact remains I am a US bull and that is not changing in the second half of the year. The fact is the US has led the global recovery post-Covid and continues to post stronger GDP numbers that the average developed market. This bodes well for economic health, but also for the corporations that underpin the economy. If we look at a comparison between the US and the “developed world”, we see stronger growth domestically on a sustainable basis: GDP Growth (US vs. Remaining G10) (Goldman Sachs)I simply view this positively for most (if not all) of my US-focused holdings. The boost to economic activity is good for DVY too, and I see it benefiting some of the other sectors I haven’t discussed in this review. These would include Materials, Industrials, and Consumer Discretionary. While these three don’t make-up the bulk of the underlying assets, they still account for almost 20% of the portfolio’s total exposure. So I would surmise what is good for these sectors will provide a nice tailwind for DVY. Reminder: Dividend Payers Win Over Time My final thought is a reminder on why “dividends” can make a difference in one’s portfolio. DVY, as mentioned, focuses on companies that have paid a dividend consistently for at least five years. This doesn’t mean they always have or always will, but it does offer some sustainability to the distribution payouts because companies are not apt to cut dividends unless they have to. The reason why this is important to me in my portfolio is because owning dividend payers is a time-tested market approach. If we look at the S&P 500, which is the index where most of DVY’s holdings also reside, we see that companies that current pay, initiate, or grow their dividends over time tend to out-perform the companies that do not pay a dividend (or have cut one): Returns of Stocks Based on Dividend Payouts (Within S&P 500) (The Hartford)This is an important point because it is not the actual dividends themselves that I find so attractive. Yes, I like income coming in every month, but that by itself does not create wealth since the stock price drops by a comparable amount. So dividends don’t create portfolio value any more than seeing a stock price rise. But what does excite me about dividend payers is their tendency to beat the market over time. That is why I focus on dividend payers – not so much for the dividend but because of what the dividend represents. It represents prudent cash management, a willingness by corporate leaders to reward shareholders with consistent payouts, and the ability to grow a business over time. These are traits I look for in assets I want to buy, and dividend payers tend to have them. This should help explain why I like DVY, as well as many other dividend-focused ETFs out there in the market today. Bottom Line DVY has been a long time winner in my portfolio and I see no reason why this won’t continue. The fund offers diverse exposure to sectors that are cheaper than the S&P 500 and has a dividend payout that is growing at a healthy clip. This is also a more defensive ETF that should provide some shelter if volatility picks up in the market in the near term, which I do expect. All things considered, this isn’t a fund that is going to wildly beat the market in the short-term, but it is one that offers steady, reliable returns and can provide balance to a portfolio like mine that is Tech-dominated. As a result, I will be maintaining my “buy” rating on the fund and I suggest that my followers give the idea some thought in the weeks ahead.

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