ETF DVY: diversified portfolio, stable return, lower multiples (NASDAQ: DVY)
iShares Select Dividend ETF (NASDAQ:DVY) is a fully diversified, large-cap exchange-traded fund (ETF) launched by BlackRock, Inc. and managed by BlackRock Fund Advisors. The fund has assets under management (AUM) of over $22.26 billion that he invested in public shares of 99 companies listed on the US stock market. The fund was created on November 3, 2003 and regularly pays quarterly dividends since its inception. DVY recorded extremely stable growth yield between three and four percent over the past 10 years, and its average return is 3.3 percent over that period.
DVY has also distributed its investments in core/basic industries (materials, utilities, energy, real estate and consumer staples) and its investments in secondary and tertiary industries (information and communication technology, healthcare, consumer discretionary , financial and industrial). Basic sector businesses derive their income from the very basic needs of people and industries (e.g. food, housing, gas, minerals and electricity). Although these stocks are more stable, because these companies are less affected by the economic recession, companies in secondary and tertiary industries generate higher growth, but are also more volatile.
About 51% of DVYs wallet is invested in 48 basic industry companies, of which nearly 27% in 28 utility companies. The remaining 49% are invested in 51 other companies, of which 22.5% is invested in 15 financial companies. Since the operation of these companies is not an integral part of human existence, these stocks tend to be affected more due to economic growth and downturn. Furthermore, this fund has no investments in real estate companies. Each stock here occupies a very small proportion in the DVY portfolio. Only two stocks out of 99 – Altria Group Inc. (MO) and Oneok Inc. (OKE) have more than 2 percent share in the entire investment portfolio of DVY.
iShares Select Dividend ETF seeks to replicate the performance of the Dow Jones US Select Dividend Index using representative sampling techniques. The Dow Jones US Select Dividend Index is comprised of US stocks paying high dividends. In representative sampling, certain stocks in the benchmark index are selected to reflect the characteristics of the index. To represent the benchmark, stocks are selected from all sectors, all geographies and across all types of market capitalization.
Since its inception in November 2003, iShares Select Dividend ETF has been able to mimic its benchmark and generate an annual average to return to 8.8%, compared to 9.36% of its benchmark index. In the past 10 years, DVY’s market return was very healthy at 12.4% versus its benchmark’s 12.8%. Over the past 5 years and 3 years, DVY has recorded an average market price growth 10.6% and 15.4% respectively. Over the same periods, the benchmark had an annual average growth 11% and 15.8%. The difference with the benchmark is purely due to its expense ratio, which is currently 0.38%.
The past five years have been extremely volatile for the iShares Select Dividend ETF. While he grown up by 15%, 22.5% and 32% in 2017, 2019 and 2021 respectively; The price of DVY fall 6% in 2018 and 4.5% in 2020. As we all know, 2018 was a very bad year for the US stock market due to higher tariffs, interest rate hikes and debt cuts. taxes. On the other hand, this fund based on the Dow Jones Select Dividend Index has been hit hard by the covid-19 pandemic.
iShares Select Dividend ETF holdings averaged PER of 13 and one P/P ratio of 2. Price multiples suggest this fund is slightly undervalued. Although this stock is trading very close to its 52-week high of $130, there is no indication that the price will fall. All longer-term simple moving averages (SMA) are placed below the short-term moving averages. As on April 8, 2022, the 200-day SMA (120.46), the 100-day SMA (123.4), the 100-day SMA (125.43) and the 10-day SMA (128.55) are exactly in sync, so expect a steady bull run. Given the strong fundamentals, I’m a bit surprised by the current level of price multiples for this diversified ETF.
An extremely balanced diversification that includes both stable stocks and high growth stocks, a stable dividend, strong and steady long-term price growth and the current level of lower price multiples make this ETF very attractive, in particular especially for long-term investments. The US economy has seen enough volatility over the past five years. Unemployment, higher rates, interest rate hikes, tax cuts, inflation all played their part. On top of that, COVID-related supply chain disruptions and worker shortages have compounded the situation.
However, extremely balanced diversification has helped this fund recover from the downward movement in 2018 and 2020. DVY’s dividends have consistently been above 3% for the past 10 years. I see no reason why DVY can’t continue its historic growth and generate a stable total return between 12% and 18% over a longer time horizon. As a growth investor, I would definitely like to keep the iShares Select Dividend ETF in my investment portfolio.
However, the Dow Jones US Select Dividend Index, as well as this iShares Select Dividend ETF cannot neutralize or overcome periods of weak growth. Over the past five years, the stock had risen and fallen every two years. With uncertainties over the economic recovery and energy prices looming on the horizon, and the fund already trading near its 52-week high, a move lower on unfavorable news or a stock market scenario cannot be completely ruled out. To be on the safe side, I’d like to hedge this ETF with call and put options, preferably longer term, as I don’t expect a significant downside movement any time soon.
Currently, options with the longest expiration date are available for January 20, 2023 at a strike price between $40 and $185. The wide range of option strike prices at an expiration date of more than nine months can also be taken as an indicator of investors’ expectations of the huge price movement on either side. In order to protect my investments from an unlikely downfall, I would rather spend an extra $7 to buy a January 20 put option at a strike price of $125, so that my main investment does not suffer a loss of more than 9%. .