iShares DVY ETF: 3% yield, good value, below par quality (NASDAQ: DVY)

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This series of articles on dividend ETFs aims to evaluate products based on the relative past performance of their strategies and the quality indicators of their current portfolios. As holdings and their weightings change over time, I may update reviews from time to time. at the time.

DVY strategy and portfolio

The iShares Select Dividend ETF (NASDAQ:DVY) has tracked the Dow Jones US Select Dividend Index since November 2003. Its current payout yield is 2.93% and the total expense ratio is 0.38%.

As described in the prospectus by iShareseligible shares are issued by Dow Jones US Index companies, excluding REITs, which comply with the following rules:

  • Dividend per share above its five-year average.
  • Five-year average dividend coverage greater than 167%.
  • Average daily trading volume greater than 100,000 shares (200,000 for new settlors).
  • Paid dividends in each of the previous five years.
  • Earnings per positive action.
  • Free float-adjusted market capitalization of at least $2 billion ($3 billion for new constituents).

The underlying index is made up of 100 of the highest paying eligible stocks. It is replenished annually and rebalanced quarterly.

DVY invests almost exclusively in US companies (98.2%), approximately 50% in the mid cap segment, 39% in large companies and 11% in small caps. DVY is much cheaper than the S&P 500 (SPY) when it comes to typical valuation ratios, shown in the chart below.

DVY

TO SPY

Price / Earnings TTM

1:35 p.m.

21.92

Price / Book

1.95

4.23

Price / Sales

1.44

2.94

Price / Cash Flow

9.91

5:15 p.m.

The heaviest sectors are utilities (26.4%) and financials (21.5%). The other sectors are below 10%. Compared to SPY, the fund is massively overweight the 2 main sectors and, to a lesser extent, consumer staples, materials and energy. It is underweight technology, consumer discretionary, healthcare, industrials and communication services, and excludes real estate by design.

DVY sectors

DVY sectors (Graphic: author; data: Fidelity)

The top 10 holdings, listed below with weightings and some fundamental ratios, represent around 18% of the asset value. The largest holding is 2.46%, so individual stock risks are low.

Teleprinter

name

Mass%

EPS growth %TTM

P/E TTM

P/E front

Yield%

MO

Altria Group Inc.

2.46

-44.48

40.34

11.09

6.70

okay

ONEOK Inc

2.03

144.80

21.17

18.09

5.28

VLO

Valero Energy Corp.

1.84

164.66

45.69

12:49

3.79

IBM

International Business Machines Corp.

1.81

1.73

20.26

13.13

5.10

PM

Philip Morris International Inc.

1.75

12.95

17.11

4:60 p.m.

5.02

BROWN

Gilead Sciences Inc.

1.66

6218.18

12.36

9:40 a.m.

4.79

J

AT&T Inc.

1.59

464.54

8.59

8.06

4.68

EIX

Edison International

1.58

0.97

35.46

15.69

3.96

LYB

LyondellBasell Industries NV

1.57

294.80

5.98

6.51

4.51

VZ

Verizon Communications Inc.

1.57

23.76

9.90

9.67

4.86

Historical performance

Since its inception in November 2003, DVY has underperformed SPY in terms of total return and risk-adjusted performance (Sharpe ratio). The difference in annualized return is moderate: 1.3 percentage points. A deeper maximum drawdown indicates higher risk.

Full return

Annual return

Sample

Sharpe report

DVY

386.92%

8.98%

-62.88%

0.58

TO SPY

508.63%

10.31%

-55.42%

0.67

Data calculated with Portfolio123

The following graph plots the equity value of $100 invested in DVY and SPY since DVY’s inception.

DVY vs. SPY

DVY vs. SPY (chart: author; data calculated with Portfolio123)

DVY was almost on par with SPY in its first 10 years, then it started to underperform in 2017, like many dividend funds.

In previous articles, I’ve shown how three factors can help reduce risk in a dividend portfolio: asset yield, Piotroski’s F-score, and Altman’s Z-score.

The following chart compares DVY since inception with a subset of the S&P 500: stocks with above-average dividend yield and ROA, good Altman Z-score and Piotroski F-score, and sustainable payout ratio . It is rebalanced annually to make it comparable to a passive index.

Full return

Annual return

Sample

Sharpe report

DVY

386.92%

8.98%

-62.88%

0.58

Dividends and quality subset

899.21%

13.32%

-42.60%

0.87

Past performance is not a guarantee of future returns. Data source: Portfolio123

The Dividend Quality subset beats DVY by 3.3 percentage points in annualized yield and has a much lower risk of drawdown. However, the performance of the fund is real and the subset is hypothetical. My base portfolio contains 14 stocks selected from this subset (more info at the end of this article).

DVY scanning with quality measurements

I scanned DVY’s holdings with my quality metrics, considering risk stocks to be companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio and bad or questionable Altman Z- score. I have excluded financial data where these measures are less relevant. With these assumptions, 14 out of 100 stocks are risky and weigh around 15% of the asset value.

Based on my calculations, DVY’s Altman Z-score Piotroski and Aggregate Asset Return are significantly lower than SPY’s overall values. These measures indicate a portfolio quality below the benchmark.

Aggregates

Altman’s Z-score

Piotroski’s F-score

ROA % TTM

DVY

2.00

6.0

5.38

TO SPY

3.56

6.5

7.87

Take away

DVY owns 100 dividend stocks selected according to systematic rules. REITs are excluded. Nearly 48% of asset value is concentrated in two sectors: utilities and finance.

Value measures look attractive, but they may be the result of a sector bias: financials naturally have low valuation ratios. The quality of the portfolio is significantly below the benchmark according to my parameters.

DVY has underperformed the S&P 500 in total return since 2017. Historical data also points to higher downside risk. The 3% yield is attractive for income-seeking investors, but the risk-adjusted performance is disappointing compared to dividend growth funds such as Vanguard Dividend Appreciation ETF (VIG) (review here) and WisdomTree US Dividend Growth ETF (DGRW) (review here). For the sake of transparency, my equity investments are split between a passive ETF allocation (DVY is not one of them) and an actively managed equity portfolio, whose positions and trades are disclosed in Quantitative Risk & Value.

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