DVY: Buy For Balanced Dividend Portfolio And Value Rotation In 2024

The iShares Select Dividend ETF (NASDAQ:DVY) is a large equity ETF with a focus on dividend-paying companies in the U.S. Like many other large dividend ETFs, DVY offers many benefits, including high dividends, a diversified portfolio, and good risk tolerance. It is particularly interesting to me because DVY has a portfolio structure that puts more weight (27.9%) in the utilities sector. It is also a bit heavy in the financial sector (26.65%), with very little in the technology sector (3.54%). A portfolio like this should be positioned well for possible market rotations in 2024. DVY also features a steady dividend growth history that could make it a great play for a total return.

Inspired by the “Dogs of Dow” strategy, I’ve been watching some dividend stocks that I call dividend dogs very closely since January of this year. My initial expectation was to pick up some quality stocks that pay good dividends around 4% that can also have a good recovery run for a sizable total return in 2024. I have been constantly struggling with value and dividend stocks, which could come from companies of many different types and from many different industries and sectors. They have different cycles and may react to the rate cut and/or inflation differently as well.

So I turned to dividend ETFs for help – in particular, the ETFs with satisfactory dividend growth history. I have a much better chance of picking up a good bunch in a basket. The ETF diversification can further help me better deal with the current macro uncertainty with the U.S. economy and inflation.

Using dividend history to spot good dividend ETFs

One interesting dividend ETF I have found is the iShares Select Dividend ETF, DVY. It is designed to track the performance of the Dow Jones U.S. Select Dividend Index. Notice the “Dow” relevance, which supports my original thesis based on Dogs of Dow.

According to the iShares official site, DVY invests in high-dividend-yielding U.S. stocks. It is a large equity ETF with about $18 billion in Net Assets. As shown below, DVY pays a good dividend with a 3.62% 12-month trailing yield. The PE looks healthy at 14.52%, and the volatility is relatively low.

The expense ratio is a little high at 0.38% compare to

Note that DVY deploys a dividend-weighted strategy. The following shows a list of top 20 companies:

It has many utilities and financial companies in the top 20. The sector breakdown shows a rather heavy bias toward the Utility and Financial sectors, which I will analyze in greater detail later.

It skews toward firms paying consistent dividends so, at the aggregate level, DVY has an impressive dividend growth history with 6.33% 5-year growth rate as recorded in the SA database.

I’ve been paying special attention to DVY’s stable dividend growth pattern, as shown in the figure below.

I usually use the dividend growth history as a NorthStar indicator to identify my conviction of quality companies in this space. It works well for me in particular with dividend ETFs because I believe stable dividend history is the ultimate proof for a well-structured ETF with superior strategy and quality constituent companies in the holdings. As I mentioned, selecting one conviction takes time. Selecting a hundred of such could be an impossible mission. I prefer one or two key indicators for the EFT itself and leave the heavy lifting to the fund (management). I’m confident in ETFs with an excellent dividend track record.

On the other hand, I’ll be wary if I see an unstable dividend history. As an example, the following shows a rather inconsistent dividend history for the SPDR® Portfolio S&P 500 High Dividend ETF (SPYD). This is the dividend ETF I decided to pass on, even though it pays a higher dividend.

There is another dividend ETF I have already owned in my dividend portfolio for some time, which is the Schwab U.S. Dividend Equity ETF (SCHD). SCHD demonstrates an excellent dividend growth history as shown below. In my view, this is one of the reasons why SCHD is highly regarded as one of the top dividend ETFs.

Using the SA rating system to compare three dividend ETFs, DVY has strength in dividend category.

Constructing a flexible and balanced dividend growth portfolio using the DVY sector mix

Looking further into DVY, I can find a diversified portfolio of about 100 dividend-paying stocks across different sectors and industries. However, comparing it with SCHD portfolio as shown below, I noticed the following subtle differences:

• DVY has a rather heavy bias on the Utility sector at 27.64%, and the Finance sector is also substantial at 26.60%. With SCHD, the Utility sector is tiny at only 0.03%, and its Finance sector is at 17.08%

• DVY assigns heavy weight to their top two sectors with a sum exceeding 54% of the total fund holdings. SCHD is more scattered over 7 sectors with more or less similar percentage levels for each sector.

• DVY is very diversified with its 105 holdings and assigns equal weight across holdings. The top 10 holdings account for 18.11%. On the other hand, SCHD is top heavy with the top 10 constituting 39.84% of the total.

• DVY Technology holding is very small at 3.64%. I call it a non-Technology ETF. This actually will make significant impacts on the ETF performance in time, which I will analyze further later. SCHD has a higher weight on Technology at 8.81%, but it is also not significant for the portfolio. However, it is more than twice as much as DVY.

• SCHD has more weights on Healthcare (15.16%) and Industry (13.83%) than DVY at 4.58% and 2.17% respectively.

One key takeaway is that I view DVY as an excellent complement to SCHD in my dividend growth portfolio, in particular for the sector coverage. Specifically, I like the Healthcare and Industry exposures from SCHD, and the Utilities exposure for DVY. I feel more comfortable using DVY to start Utilities exposures for my portfolio.

I view the DVY addition as necessary for my dividend portfolio because I’m very concerned with the top 10 high concentration (about 40%) with SCHD. DVY gives me some flexibility to calculate the weights and accordingly adjust ETF positions with weights on the sectors that I’m interested in. For example, I can add more DVY shares to increase the Utility holding percentage or I could trim the SCHD position to reduce the Technology exposure further.

The DVY and SHCD ETF combo allows to me to go all-in with my dividend investment budget. It’s advantageous to have a bit of a tuning mechanism available for sector balance, so I can deal with different market situations in case if necessary.

Getting ready for sector rotations in 2024

Looking forward 12 months or so, I expect the stock market to have a few rotations. There could be a rotation from mega tech to small caps, from technology to non-technology sectors, to dividend stocks that have been a performance dragger in my portfolio, to sectors due to the market value revert triggered by the FED rate cut, etc.

The Utilities sector looks particular interesting to me in 2024. This is the sector in which I find many stable dividend stocks and value names. The Utilities sector market has been suppressed in comparison to the broader market for quite some time, so it could stage a remarkable comeback if macro conditions such as a rate cut warrant it. In this case, using DVY for Utility exposures in my portfolio makes perfect sense.

I’m expecting major rotation to take place in 2024. This is the rotation trend inline, moving from over-valued Technology areas to the traditional value/dividend sectors. A dividend portfolio using the strategy of combining DVY and SCHD should perform well in 2024. Keep in mind that both are light with Technology exposures.

The following chart shows the price trend for DVY and SCHD in the past 6 months.

Technically, the chart looks encouraging for both dividend ETFs. I view it as a positive signal for more comeback in 2024 potentially. I believe now is a good point for me to initiate a position with DVY and perhaps pick up more SCHD shares as well.

Risks & Caveats

In a shorter term such as 2024, factors such as current market conditions, economic outlook, and changes in interest rates are still uncertain. These factors can all affect the performance of dividend ETFs. The portfolio using a combination of DVY and SCHD may not perform well, although its diversification and low volatility still help reduce market risks.

Another potential risk is that the sector rotation may not happen in 2024. Technology may still outperform other sectors. The Utility sector may still stay depressed. The dividend portfolio may not have the expected total return. Getting a good total return would require a different portfolio strategy, depending on investment goals and timelines.

Conclusion

DVY is a dividend ETF with a good dividend growth history. It has heavy bias on the Utility sector, where many quality dividend value stocks can be found. I expect the Utilities sector to stage a material recovery in 2024 when the interest rate is stabilized and the FED rate cut gets started. DVY has a sector mix that is largely complementary to a top10 high-concentration dividend ETF like SCHD. Having both in the portfolio will help create a balanced dividend growth portfolio. It is especially important for me to have the flexibility of adjusting sector holdings so I can be better prepared in an increasingly uncertain year like 2024. I also see DVY playing a key role in the dividend portfolios for value investors who are seeking a meaningful total return from rotations to traditional value sectors in 2024 and beyond. I rate DVY a buy.