DJD: Attractive Valuation, Average Quality And Return

This text sequence goals at evaluating ETFs (exchange-traded funds) relating to the relative previous efficiency of their methods and metrics of their present portfolios. Critiques with up to date information are posted when mandatory.

DJD technique and portfolio

Invesco Dow Jones Industrial Common Dividend ETF (NYSEARCA:DJD) began investing operations on 12/16/2015 and tracks the Dow Jones Industrial Common Yield Weighted Index. It has 27 holdings, a 12-month distribution yield of three.36% and an affordable expense ratio of 0.07%.

As described by Invesco within the prospectus,

the Underlying Index is calculated utilizing a yield-weighted methodology that weights all dividend-paying constituents of the Dow Jones Industrial Common™ by their twelve-month dividend yield outlined as a inventory’s annual dividend (not together with any particular dividends) divided by its worth. The Underlying Index is rebalanced semi-annually (…)

The underlying index description reminds of the Canines of the Dow technique, which consists in shopping for the ten corporations with the best dividend yields within the Dow Jones Industrial Common (DIA). The highest 10 holdings of DJD are the “Canines” on every rebalancing day. Then, positions might drift with worth motion. The present high 10 names are listed beneath with elementary ratios. The fund is kind of concentrated: they characterize 56.7% of asset worth. Publicity to dangers associated to the highest names is analogous for DIA, whose high 10 holdings weigh 55.4% in combination.

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Three constituents of the Dow Jones are lacking in DJD as a result of they don’t pay dividends: Boeing (BA), Salesforce (CRM) and Disney (DIS).

The 2 heaviest sectors are know-how (17.1% of belongings) and client staples (16.3%). In comparison with the dad or mum index, DJD overweights client staples, power, communication, supplies, and to a lesser extent, power. It underweights principally healthcare, financials and client discretionary. DJD is extra balanced than DIA throughout sectors.

Efficiency

Since inception in December 2015, DJD has underperformed its dad or mum index by about 21% in whole return.

It has lagged by 8.5% within the final 12 months.

The fund pays quarterly dividends. The annual sum of distributions has elevated from $0.71 per share in 2016 to $1.38 in 2022. It is a progress of 94%, whereas the cumulative inflation has been about 23% on the identical time (primarily based on CPI). DJD seems fairly enticing relating to previous dividend progress, however the underlying index is just not designed to ensure it sooner or later.

In earlier articles, I’ve proven how three elements might assist reduce the chance in a dividend portfolio: Return on Belongings, Piotroski F-score, and Altman Z-score.

The following desk compares DJD since 1/1/2016 with a subset of the S&P 500 together with shares with an above-average dividend yield, an above-average ROA, a superb Altman Z-score, a superb Piotroski F-score and a sustainable payout ratio. It’s rebalanced yearly to make it comparable with a passive index.

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Previous efficiency is just not a assure of future returns. Knowledge Supply: Portfolio123

DJD lags this dividend high quality subset by 38% in whole return. Nonetheless, the fund’s efficiency is actual, whereas the subset is simulated. My core portfolio holds 14 shares chosen on this subset (extra information on the finish of this submit).

Scanning DJD portfolio

DJD is considerably cheaper than DIA relating to the standard valuation ratios, as reported within the desk beneath.

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Knowledge: Constancy

In my ETF critiques, dangerous shares are corporations with no less than 2 crimson flags amongst: unhealthy Piotroski rating, damaging ROA, unsustainable payout ratio, unhealthy or doubtful Altman Z-score, excluding financials and actual property the place these metrics are unreliable. Out of 27 holdings, three are dangerous relating to these standards: Intel (INTC), Verizon (VZ) and Walgreens Boots Alliance (WBA). They weigh 17.9% of asset worth, which is kind of heavy.

Based mostly on my calculation of combination Altman Z-score, Piotroski F-score and ROA, DJD could be very near DIA in portfolio high quality.

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Takeaway

Invesco Dow Jones Industrial Common Dividend ETF holds the 27 shares of the Dow Jones Industrial Common paying a dividend, with weights primarily based on yields. The fund is best balanced throughout sectors than the dad or mum index. Nonetheless, it’s fairly concentrated within the high holdings. DJD seems higher than DIA relating to valuation, and high quality is analogous. Furthermore, the dividend progress price since inception has outpaced inflation by a large margin. Nonetheless, whole return is underwhelming, particularly within the final 12 months.