DJD: Who Should Buy This 3.40% Yielding DJIA Dividend ETF (NYSEARCA:DJD)

Investment Thesis

There’s nothing fancy about the Invesco Dow Jones Industrial Average Dividend ETF (NYSEARCA:DJD), an appealing ETF for no-nonsense investors wanting a simple solution to satisfy their high yield, low volatility, and low valuation needs. DJD was among the top performers last year and has potentially bottomed, but I want to highlight some concerning statistics, like its meager sales growth rate. My conclusion is DJD is a good, but not great, dividend ETF, and I look forward to taking you through some of its fundamentals next.

Strategy Discussion and Key Exposures

DJD tracks the Dow Jones Industrial Average Yield Weighted Index, holding 27 dividend-paying stocks in the DJIA and weighting them by their trailing dividend yields. The result is a low-volatility portfolio that trades at just 15.47x forward earnings, a four-point discount to the SPDR Dow Jones Industrial Average ETF (DIA). One concern is a lack of diversification, but assuming you already own other well-diversified ETFs, it’s not necessarily negative.

The three excluded stocks are salesforce.com (CRM), Boeing (BA), and Disney (DIS). Excluding them contributed to DJD’s solid performance in 2022, as the average loss was 32.37%.

Compared to DIA, DJD overweights Consumer Staples and Materials and underweights Consumer Discretionary and Health Care. These exposures are similar to when I last reviewed the fund. The holdings hardly change, and reconstitutions effectively sell the best-performing stocks and buy the worst-performing stocks to maintain the high yield. Furthermore, DJD’s low 0.07% expense ratio means investors will net close to the weighted average of the underlying holdings.

The Schwab U.S. Dividend Equity ETF (SCHD), a solid benchmark with a similar estimated dividend yield, overweights Financials, mainly lower-market-cap Regional Banks, by 7.38%. Size is an essential distinction between the two ETFs. DJD’s larger holdings are more profitable, but the simple strategy that overweights poor performers requires fortunate timing. I think that explains why DJD has trailed over high-yield alternatives since its launch, but first, let’s look at the top ten holdings, which total 56.83%.

Verizon Communications (VZ), Dow (DOW), and IBM (IBM) are the top three because they yield 6.19%, 5.09%, and 4.59%. Intel (INTC) and 3M (MMM) are also prominent holdings whose prices are low due to earnings misses and long-term legal issues.

Performance and Dividends

DJD beat the market last year, but so did several other dividend ETFs. I’ve listed the performance of 30 below that yield around 3% or more, sorted by best-to-worst one-year returns as of December 2022.

In addition to SCHD, the iShares Core High Dividend ETF (HDV) is another low-cost option with a similar dividend yield. The graph below compares the long-term risk and return statistics for these funds.

DJD gained an annualized 11.29% since its December 2015 launch. SCHD gained 13.90% with about the same volatility, leading to better risk-adjusted returns (Sharpe and Sortino Ratio). The 100-stock fund utilizes four screens rather than yield alone and will reconstitute in March. On the other hand, HDV’s 9.29% annualized returns look poor, but the ETF experienced a resurgence in 2022 because it overweighted Energy stocks. Like DJD, it’s a focused portfolio that may be an appropriate complementary holding.

Finally, Seeking Alpha gives DJD a “B-” Dividend Grade, with neither its dividend yield nor dividend growth grade standing out. The 9.85% five-year growth figure is solid but not organic. Based on current weightings, DJD’s constituents have a 7.09% five-year growth rate, meaning the growth partially comes from rebalancing into the lowest-priced, highest-yielding securities each March and September.

ETF Analysis

Fundamentals By Company

The following table summarizes fundamental metrics for DJD’s top 25 holdings and compares them with DIA, SCHD, and HDV. I want to highlight DJD’s excellent 9.85/10 Profitability Score, derived using Seeking Alpha Factor Grades. It’s a reminder that the Dow Jones Industrial Average is a high-quality Index regardless of how constituents are weighted.

This table nicely identifies DJD’s tradeoffs with DIA. DJD is a less-volatile portfolio, as indicated by its lower five-year beta (0.85). Expected sales and earnings growth is 3-4% less, but DJD trades at a four-point discount on forward earnings, so investors are somewhat compensated. DJD’s constituents yield 3.47% (net 3.40%) compared to 2.12% (net 1.97%) for DIA, and there’s less historical dividend growth (7.09% vs. 9.90%). I believe that DJD is superior in flat and declining markets but will substantially lag in a bull market. It’s a common theme with high-dividend ETFs and helps explain past returns.

While DJD may be a smarter way to buy the DJIA, it fails to stand out against competitors like SCHD and HDV. For starters, a low beta isn’t unusual with high-dividend ETFs. Among large-cap and high-yield dividend ETFs, the average beta is 0.94, with 19 options at 0.90 or below. I previously demonstrated that a yield above 3% is relatively easy to find, and SCHD and HDV are reasonable low-cost alternatives. These ETFs also have better growth rates, a key consideration since DJD’s estimated 5.78% revenue growth rate is the fifth-worst among 64 dividend-focused ETFs.

Encouraging Signals

On October 24, I expressed concern about four prominent holdings totaling 24.69% of the ETF: Walgreens Boots Alliance (WBA), Verizon Communications (VZ), 3M (MMM), and Intel (INTC). Let’s see how they have since performed against DJD.

The average return was 9.88%, slightly below DJD’s 10.85%. While technically a drag on the ETF, these results are encouraging and appear driven by improving analyst sentiment. Consider these improved Seeking Alpha EPS Revision Grades from October:

• Walgreens Boots Alliance: “C” to “B”
• Verizon Communications: “C” to “B-“
• 3M: “C-” to “C”
• Intel: “F” to “D-“

These improvements allowed DJD to leapfrog SCHD on the net EPS Revision Score metric. Previously, DJD trailed SCHD 4.65 to 5.61. Today, it leads 5.78 to 5.61. Reasons include:

• Walgreens squeaked out another non-GAAP earnings beat on January 5 and upped FY2023 sales guidance by $4 billion.
• On January 4, Verizon’s CEO announced the company added subscribers in Q4 and plans to cut spending in 2023.
• With pending lawsuits that could last years, 3M remains one of the DJIA’s biggest risks, but the company still beat analyst earnings estimates for the ninth consecutive quarter.
• Intel has tagged along other chipmakers led by QUALCOMM this year. The benchmark iShares Semiconductor ETF (SOXX) is up 5.54% YTD.

Investment Recommendation

Conservative dividend investors should consider DJD. Its key attributes are a low 0.85 five-year beta, a 3.40% expected dividend yield, an outstanding 9.85/10 profit score, and a cheap 15.47x forward earnings valuation. There’s also a possibility that markets have bottomed, as analysts are slowly increasing earnings per share estimates for several at-risk stocks like Intel and 3M. However, such improved sentiment will likely lead to underperformance relative to DIA and other high-yield alternatives like SCHD and HDV because of poor sales and earnings growth. Therefore, DJD is a good but not great option for dividend investors. Thank you for reading, and I look forward to the discussion in the comments section below.