Dividend Investor - but why I still not invest in dividend ETFs
Beforehand: This is not investment advice. Nor is it an invitation to buy/sell securities. I describe here only my own opinion. You decide for yourself what you do with your money.
Recently I have noticed that more and more questions are being asked about dividends, but especially about dividend ETFs. Often it is about expanding a world portfolio with dividend ETFs, in order to be able to participate in the apparent security of the "new interest". Unfortunately, there are often misunderstandings about how these funds work. Therefore, I briefly explain in my own words what characterizes a dividend ETF and then move on to my opinion. I do not want to criticize anyone in their investment strategy - it is rather intended as an open exchange of opinions.
A dividend ETF tracks indexes that essentially contain dividend payers. A dividend in this case is a profit distribution that reduces the share price by the corresponding amount and is issued to the shareholders. The share price performance and the dividend do not necessarily have to be linked in a predictable manner, nor is there any entitlement to the dividend. It is a voluntary payment by the company. Often dividend ETFs collect these dividends received and distribute them in quarterly rhythm four times a year. This offers the advantage of predictability - one knows when which ETF will pay out. (cf. (1), cf. (2))
To ensure these regular distributions, dividend ETFs refer to indices such as the SPGDASUN - i.e. the S&P Global Dividend Aristrocrats Quality Income Index. In this index, a pre-selection of 94 companies has been selected from the S&P 500, with the top 10 positions accounting for 20.6% of the index. All companies included must have maintained stable or increased dividends for at least 10 years. Furthermore, the market capitalization must be USD 1 billion. There are only 2 well-known representatives from the IT sector in the top 10: Western Union and IBM (see (3), pp. 2-4).
Why do I mention this?
It is quite simple: which sector has benefited the most in recent years due to the interest rate turnaround, Corona, structural shortage of semiconductors and online shopping? The answer is generally the IT sector. Characteristics of such sectors are often the strong growth factor - i.e. possible dividends from profit surpluses are often retained or paid out only sporadically, so that above mentioned consistency criteria are not met. Thus, this index missed out on massive growth, which was also reflected in a clear outperformance of the tech sector of 65% vs. the MSCI World. Not to mention the above mentioned S&P Global Dividend Aristrocrats Quality Income Index. (see (4))
Nevertheless, if one compares this index with its larger and more general S&P 500 on e.g. SPGlobal.com (source 3), a clear difference stands out despite the relationship of both indices. While the S&P 500 returned 11.88% over the 5-year cycle, the S&P Global Dividend Aristrocrats Quality Income Index returned only 0.02%. It is also notable that after collapsing in the Corona Crash in early 2020, the recovery in the S&P 500 was much faster than its counterpart. This is also evident for the reasons mentioned (see (3), (4)).
Of course, not everyone is concerned with maximizing the performance of the index. Nevertheless, I think it is important not to increase the disadvantage of renowned and relatively slow growing companies by linking them to typical ETF disadvantages such as the cluster risk related to industry and possibly also countries. In my role as a dividend investor, I have the option of either betting on the dividend growth effect or alternatively selecting growth companies that have reached the end of their growth and are now increasingly emerging as dividend payers. A secondary portfolio with a different investment strategy is also conceivable.
But a far more powerful tool tends to be the dividend growth effect. In another commentary, I have already calculated that with consistent buy & hold of Coca-Cola shares from 10 years ago to today, one would have generated a dividend yield of 5.231%. This does not seem high at first - but if you consider the security and stability of the dividend increases of the Coca-Cola Group over the last 60 years, the continuous growth and the associated security becomes clear (see (5)). Warren Buffet's personal dividend yield is now even over 50% (see (6)).
As a result, my dividend portfolio is based on a broad market index in order to participate in the global economic growth of the large caps and without having to worry directly about the political risks of the emerging markets. My satellites use the above mentioned effects of continuous dividend increases and stability, so that I can take advantage of both worlds (dividend vs. growth investments).
This is not investment advice or a solicitation to buy or sell securities.
We are welcome to discuss individual points. I wanted to share my own opinion on the topic of dividend ETFs with you.
Sources:
(1) https://finanzwissen.de/etfs/dividenden-etfs/
(2) https://www.weltsparen.de/geldanlage/etf/dividenden-etf/
(3) https://www.spglobal.com/spdji/en/indices/strategy/sp-global-dividend-aristocrats-quality-income-index/#overview
(4) https://www.ideas-magazin.de/2022/ausgabe-243/titelthema/
(5) https://aktienfinder.net/dividenden-profil/Coca-Cola-Dividende
(6) https://www.finanzen.net/nachricht/aktien/der-rendite-turbo-so-fulminant-wirken-sich-reinvestierte-dividenden-auf-das-eingesetzte-kapital-aus-9498542