Why This Overlooked Dividend ETF is Sauntering to New Highs

There are hundreds of dividend exchange traded funds (ETFs) listed in the U.S. In fact, dividend-based strategies are among the most popular smart funds, rivaled or surpassed by only value and growth ETFs.

Due to that large population, it's reasonable to expect that some dividend ETFs will go overlooked. Reasonable or not, some of those ignored dividend ETFs are solid funds. That group includes the VictoryShares US Large Cap High Dividend Volatility Weighted ETF (CDL). That name is a mouth full, but at nearly four years old, CDL is delivering for investors. CDL is up more than 17% year-to-date and was one of just 14 ETFs that hit all-time highs on Wednesday, Oct. 23.

The $352 million CDL tracks the Nasdaq Victory US Large Cap High Dividend 100 Volatility Weighted Index. That benchmark is comprised of the 100 highest yielding stocks from the Nasdaq Victory U.S. Large Cap 500 Volatility Weighted Index.

Some Surprises

Typically, ETFs that make a commitment to high dividends and low volatility feature large weights to the real estate and utilities sectors. CDL only honors half of that tradition as the fund has a roughly 20% weight to utilities stocks and no real estate exposure.

CDL's dividend yield of 2.91% is high compared to broader U.S. equity benchmarks, but not so high as to stoke concern about the dividend sustainability of the fund's 142 holdings. High dividend yields can be seductive, but there are reasons why investors shouldn't always take that bait.

“Not all dividend strategies are alike. Some prioritize dividend growth, while others prioritize current income,” said Morningstar in a recent note. “Those that aggressively chase yield are often riskier than their growth-oriented counterparts, as many of their holdings offer high yields because of falling share prices often resulting from deteriorating fundamentals.”

Another surprise in CDL, sort of, its almost 23% weight to the financial services sector. That sector usually isn't weighted that heavily in rival dividend ETFs because it's not particularly high yielding and many of the sector's components miss out on payout increase streak requirements in some funds due to dividend cuts during the financial crisis. Speaking of dividend growth, it was robust in the U.S. in the third quarter.

“According to S&P Dow Jones, there were 426 dividend increases in the third quarter of 2019, down from 460 a year earlier. Meanwhile, this year there were 94 decreases, up from 67,” said Todd Rosenbluth, director of ETF & Mutual Fund Research at CFRA Research, in recent research note. “The narrowed dividend breadth highlights the benefits of an ETF’s diversification.”

Some Risks, But Some Value

An obvious risk with CDL is that there's sector-level concentration risk with two groups – financials and utilities – combining for almost 43% of the fund's weight. Some of that issue is muted because none of the fund's holdings exceed weights of 1.6%, meaning stock-specific risk is minimal within the VictoryShares fund.

CDL is classified as a large-cap value and the fund lives up to that billing with a price-to-earning ratio of 14.16x, which is below the comparable metric on the Russell 1000 Value Index.

Plus, CDL has outperformed that value index this with a dividend yield is nearly 60 basis points higher.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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