Quality-stock and dividend-focused strategies shined during the market declines of 2022, rebounding from what investors may have found to be disappointing performance during the previous long bull market.
One fund that follows such an approach has outperformed during the bear market. But the TrueShares Low Volatility Equity Income ETF
is also designed to perform well in all markets. Austin Graff of Opal Capital, the fund’s manager, described his strategy and discussed three of the fund’s top holdings, one of which may surprise you.
With the Federal Reserve not done with its interest-rate increases and so many companies laying people off, investors are still navigating uncertainty. If you are an income-oriented investor, yields on bonds and preferred stocks are much more attractive than they were a year ago. And certain stock funds that use options to increase income and lower volatility have performed very well over the past year, and have high dividend yields now. Here’s an example.
An approach to income that may diversify your portfolio and improve its long-term total return is a focus on dividend growth. Current yields in these portfolios may not be very high, but this type of fund can grow income over the long-term, while also pursuing capital appreciation.
Comparing DIVZ and the S&P 500 Dividend Aristocrats
One popular way to home in on dividend growth is the strategy followed by the Pro Shares S&P 500 Dividend Aristocrats ETF
which currently holds shares of 64 companies in the S&P 500 that have raised regular dividends for at least 25 consecutive years. That is the only requirement for a stock to be included. The fund takes a passive approach to track the S&P 500 Dividend Aristocrats Index
and quotes a 30-day SEC yield of 2.12%
In contrast, DIVZ is actively managed and currently holds 29 stocks. Its portfolio typically includes shares of 25 to 35 stocks of companies that Graff expects to continue increasing dividends more quickly than the broad market. He focuses on quality, including “clean balance sheets, high returns on capital, high margins and high cash conversion.”
That last term refers to the percentage of income that is converted to free cash flow, which is cash flow left over after capital expenditures. This is the money a company can use to raise dividends, expand, acquire, buy back shares or take other actions that might benefit its owners.
DIVZ quotes a 30-day yield of 3.64%. The 30-day yield provides an indication of the annualized level of current dividend payments, and is best used for comparison.
Here’s a comparison of total returns for DIVZ and NOBL, along with the S&P 500 ETF Trust
since DIVZ was established on Jan. 27, 2021:
Here are two examples of quality/dividend approaches have outperformed the S&P 500 over the past two years.
DIVZ and NOBL have both fared quite well during a difficult period, with DIVZ the best two-year performer among the three, with dividends reinvested and after expenses, which are 0.65% of assets under management annually for DIVZ, 0.35% for NOBL and 0.0945% for SPY.
As the newest of the three, DIVZ is relatively small, with $79 million in assets under management, while NOBL has $11 billion in assets and SPY, the pioneering ETF industry giant, has $381 billion in assets.
Looking ahead, Graff expects DIVZ to keep up with the S&P 500
during bull markets, “or maybe trail a little bit.”
“But the high-quality nature of our holdings tends to dampen negative returns in down markets,” he said.
More about DIVZ’s stock selection
With DIVZ, annual expenses are higher than they are for NOBL and SPY because of the active management.
Graff underlined the advantage to long-term investors of his ability to take a much deeper look at each of the companies held by DIVZ. He also doesn’t seek to make trades frequently. Holding shares of a company that continues to fund rapid dividend growth with increasing free cash flow can grow an attractive income stream.
When asked about broad changes to allocation he made during 2022, Graff said the fund entered the year with “a relatively high allocation” to energy stocks, after increasing exposure in that area through 2021. He also said the healthcare and consumer staples sectors were still “attractive,” but not across the board. “You still have to be valuation conscious,” he said.
Here are comments Graff made about three of the largest holdings of DIVZ.
Exxon Mobil Corp.
is the fund’s largest holding, making up 6.2% of the portfolio. The stock has a dividend yield of 3.15%.
The S&P 500 energy sector was the only one of 11 in the benchmark index to rise last year. Even though oil prices gave up most of their gains by the end of 2022, the energy sector had a 66% return for the year, because investors grew confident that oil producers had learned their lesson during previous commodity cycles.
Exxon is the largest U.S. oil producer, but Graff’s comments really pointed to recent success of the entire industry: “Many of these companies have been cutting down debt and returning capital to shareholders in the form of buybacks and dividends. This is supportive to investors instead of pumping it into the ground on low-return projects,” he said.
is the second largest holding of DIVZ, making up 4.5% of the portfolio. This is the holding that might be a surprise, because the company lowered its quarterly payout by 47% in February 2022 after it completed its deal with Discovery, which acquired most of the company’s WarnerMedia segment to form Warner Bros. Discovery Inc.
AT&T’s current dividend yield is 5.56%.
“We try to avoid being dogmatic in our process,” Graff said, while explaining why the dividend cut didn’t keep him from holding the stock. “In this case, AT&T has exited some businesses that are declining or facing long-term secular challenges.”
He is pleased that a leaner AT&T is focused on fiber and wireless communications. “Since the divestitures the company has executed well, managing these businesses for cash flows while accelerating subscriber growth. “
He also likes AT&T as an inexpensive stock: “At current valuations of less than 8.5x earnings and [the roughly] 5.5% dividend yield, we think T provides investors with an attractive opportunity for both current income and capital appreciation,” he said.
Johnson & Johnson
Johnson & Johnson
is the sixth-largest DIVZ holding, making up 4.2% of the portfolio. Graff called JNJ “an interesting pharmaceutical company right now,” despite the slowing of vaccine sales. The company is planning to spin off its over-the-counter medication business into a new company called Kenvue, which will end up owning many well-known and mature brands, including Band-Aid, Listerine, Tylenol, Neutrogena and Benadryl.
“Separating this business will allow management to focus on higher growth, higher margin businesses like pharmaceuticals and medical devices,” Graff said. He added that JNJ’s management had already committed to maintaining its current dividend and expressed desire to raise payouts over time.
“JNJ has the potential to hold up well in a slowing economy, while accelerating growth,” he said, adding that at its current valuation, with a 2.7% dividend, the company is “well-positioned to generate attractive returns for investors.”
Here are the top 10 holdings of the TrueShares Low Volatility Equity Income ETF:
% of portfolio
Exxon Mobil Corp.
Verizon Communications Inc.
American Electric Power Co. Inc.
Johnson & Johnson
Lockheed Martin Corp.
Philip Morris International Inc.
Gen Digital Inc.
Sources: TrueShares, FactSet
Click on the tickers for more about each company.
Click here for Tomi Kilgore’s detailed guide to the wealth of information for free on the MarketWatch quote page.
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