Dividend stocks have enjoyed a bit of a renaissance this year. They’re also coming off three years where they deeply underperformed the S&P 500 (SNPINDEX: ^GSPC). Different stocks perform well in different environments, of course, but absolute returns aren’t always the measuring stick. What matters more is how much return they’re delivering per unit of risk taken.
There are more than 100 U.S. dividend-focused exchange-traded funds (ETFs) in the marketplace. Most trail the returns of the Vanguard S&P 500 ETF (NYSEMKT: VOO) over the past few years, but many are more competitive on a risk-adjusted return basis. The one that stands out above all the others is the Capital Group Dividend Value ETF (NYSEMKT: CGDV). But with this fund specifically, it’s important to understand why it’s done as well as it has. The answer is because this isn’t your traditional dividend ETF.
Image source: Getty Images.
One dividend ETF has risen above the others over the past three years. But it’s done so in a very unconventional way.
Dividend stocks have enjoyed a bit of a renaissance this year. They’re also coming off three years where they deeply underperformed the S&P 500 (^GSPC +0.19%). Different stocks perform well in different environments, of course, but absolute returns aren’t always the measuring stick. What matters more is how much return they’re delivering per unit of risk taken.
There are more than 100 U.S. dividend-focused exchange-traded funds (ETFs) in the marketplace. Most trail the returns of the Vanguard S&P 500 ETF (VOO +0.19%) over the past few years, but many are more competitive on a risk-adjusted return basis. The one that stands out above all the others is the Capital Group Dividend Value ETF (CGDV +0.42%). But with this fund specifically, it’s important to understand why it’s done as well as it has. The answer is because this isn’t your traditional dividend ETF.
Image source: Getty Images.
CGDV: The drivers of performance
CGDV’s Sharpe ratio of 1.67, which is a measure of risk-adjusted returns, beats both the Schwab U.S. Dividend Equity ETF (SCHD +0.41%) (0.96) and VOO (1.5) over the past three years. CGDV’s performance has been driven heavily by a huge tech overweight (30% of the portfolio) and positions in stocks with minimal yields, such as Nvidia. That means the fund looks nothing like the typical dividend ETF and much more like a growth-tilted broader market portfolio. With a dividend yield of 1.5%, CGDV isn’t a meaningful income generator.
In its mandate, the fund has the ability to invest in stocks “with the potential to pay dividends.” Translation: This dividend ETF can include non-dividend stocks. The Capital Group Dividend Value ETF has achieved its performance because it looks nothing like the typical dividend ETF that focuses on dividend growth or high-yield equities.
This is clear from the prospectus, which states that the fund can invest in companies that pay dividends or have the potential to pay dividends. In other words, paying a dividend isn’t a prerequisite for inclusion in the fund. It’s also actively managed. This gives it the ability to overweight high-conviction picks instead of remaining tethered to an index.
As a result, the managers have actively tilted the portfolio toward tech and growth stocks. Microsoft, Nvidia, and Broadcom are the top three holdings. Tech is 30% of the portfolio. Amazon, Uber, and Vertex Pharmaceuticals are in the fund, and they don’t even pay a dividend.
But from a performance standpoint, it’s unquestionably worked. Even on a risk-adjusted basis using the Sharpe ratio as a measuring stick, it’s the best-performing U.S. dividend ETF over the past three years. It even beats the S&P 500 over that time.
CGDV: Performance and key metrics
| Metric | CGDV | SCHD | VOO |
|---|---|---|---|
| 3-year annualized return | 24.4% | 14.4% | 22.2% |
| Sharpe ratio (3-year) | 1.67 | 0.96 | 1.5 |
| Dividend yield | 1.5% | 3.3% | 1.1% |
| Expense ratio | 0.33% | 0.06% | 0.03% |
| Top sectors |
Tech (30%), |
Consumer staples (19%), healthcare (19%), energy (17%) |
Tech (33%), financials (13%), communication services (10%) |
| Top holdings | Microsoft (5.4%), Nvidia (5%), Broadcom (4.5%) |
Texas Instruments (5.6%), Qualcomm (5.1%), UnitedHealth Group (5%) |
Nvidia (7.6%), Apple (6.7%), Microsoft (4.9%) |
Data sources: Capital Group, Schwab, Vanguard, ETF Action.
To be fair, the Capital Group Dividend Value ETF isn’t doing anything it isn’t permitted to do under the fund’s mandate. In fact, I think an expense ratio of 0.33% for an actively managed strategy is quite reasonable.
I’m just not a fan of the leeway the managers are allowed. It’s certainly delivered better performance than anything in the U.S. dividend ETF category over the past few years. But it’s a good reminder to always look under the hood of what you’re buying first. It may not be what you think it is.
