If you’ve ever looked for a monthly dividend ETF, you’ve no doubt come across SDIV.
This is the Global X Super Dividend ETF, which I’ll refer to as SDIV in this video.
It has historically paid around a 7% annual yield in the form of monthly dividends.
With this yield, SDIV is one of the highest-yielding dividend ETFs out there, especially among
monthly dividend payers.
And although it may sound backwards, this is the exact reason why it’s one of the
worst dividend ETFs to invest in.
So in this video, I’ll tell you exactly why SDIV is a dangerous investment for long-term
dividend investors.
On the surface, SDIV looks like a diversified portfolio that should in theory provide the
benefits of diversification and regular dividends.
However, the methodology reveals that there are actually some major flaws in their stock
selection process.
After exploring these ideas, we’ll take a look at how they’ve impacted investors'
returns since the fund’s inception, based on both dividend yield & market returns.
We’ll also dive into the dividend makeup and the taxes on those dividends, which make
it even harder for the investor to benefit from holding this fund.
To wrap it all up, we’ll consider what we can learn from the SDIV ETF to make better
investing decisions, and how you can get some free cash to start investing today.
Let’s take a look!
We’ll start by reviewing some of the key stats on SDIV.
For starters, we’ve got an expense ratio of .59%.
This isn’t exactly competitive, especially considering the fund is almost entirely passively
managed.
Most passive dividend ETFs have lower expense fees, but this isn’t too out of the ordinary
for a custom methodology.
In terms of the portfolio, SDIV offers a globally diversified portfolio of 100 holdings.
Surprisingly, just 30% of the fund is made up of US stock holdings.
While I generally support diversification, this may actually be too little weight in
US stocks by most measures.
I did a video a while back about international diversification, and dug up studies that suggested
one of two strategies for international stock weightings.
One suggested a market weight strategy, which would be about 55% US holdings and 45% international
holdings based on US market size relative to the rest of the stock market.
The other is based on previous market performance, finding that between a 20 and 40% allocation
to international stocks was optimal, leaving 60 to 80% to US holdings.
While the optimal international allocation is far from proven, both of these figures
suggest that 30% to US stocks is fairly underweight.
The next thing to point out is the sector diversification: over 40% of the portfolio
is allocated to Real estate, REITs and mortgage REITs.
This isn’t far from what I expected, as these are very much yield-oriented investments
known for high and regular cash flow.
However, this means only half of the portfolio is invested in non-real estate equities, and
as a result, investors are missing out on the diversification benefits that an appropriate
sector balance would provide.
Using VOO to compare with the sector allocation of the S&P 500, we can see that the two don’t
even come close.
Just this quick look at the portfolio characteristics reveals that SDIV is improperly diversified,
at least in comparison to total market standards.
In some cases, a solid methodology with a successful track record can justify straying
from the characteristics of things like the S&P 500.
Unfortunately, a closer look at the SDIV methodology will reveal that this is not one of those
cases.
The fund’s website breaks it down pretty simply: SDIV is composed of 100 of the highest
yielding dividend stocks available.
Their key strategy is to just buy the highest stocks by dividend yield.
If you haven’t made this dividend investing mistake on your own yet, a deeper dive into
their methodology will reveal why this is not a great long-term strategy.
SDIV starts with determining the pool of stocks that are eligible to be included in the index.
To be eligible for selection, the stock first must yield above 6%, but less than 20%.
Additionally, it must have a market cap of at least $500 million and meet minimum trade
volume requirements.
They also say that the dividend forecast “must be at least stable”.
I think this is a really funny specification, because they’re not saying they want a positive
forecast or an increasing dividend, they just want to see it as meh, it’s good enough,
to be included.
Finally, they exclude BDCs, Closed-end funds & partnerships.
While all of these are high yield investments, it would really complicate the portfolio and
likely increase the cost for investors, so I think this is actually a good decision.
Once they have narrowed down their stock pool to fit these qualifications, they select the
100 highest stocks by dividend yield.
Then, each stock is given an equal weight in the portfolio at 1%.
I’m glad they have at least identified a maximum yield for the stock selection, but
this doesn’t completely solve the problem of not screening for any meaningful qualities
within their stocks.
Ideally, they would identify some metrics like dividend payout ratio, which shows what
percentage of a company’s cash is being used to pay dividends.
They’re not looking for dividend increases, either.
Both of these are simple screening metrics that speak to the safety of a stock’s dividend
distribution.
Without these, SDIV is simply selecting the highest yielding stocks and ignoring all other
qualities.
The main problem here is that they are very likely selecting companies that are at risk
of reducing their dividends or cutting them altogether.
A company that cannot afford its dividends may also be struggling to fund its normal
operations, which could drive the stock price down over time.
Unfortunately, the portfolio adjustment guidelines don’t do anything to help this problem.
In fact, they actually make the problem worse.
As we know, SDIV starts with a portfolio of the 100 highest yielding stocks that meet
the previous criteria.
However, every year, they have adjustment days where they reevaluate their holdings.
During these adjustments, current holdings are only removed if they drop below the top
200 stocks by yield.
They must also maintain a dividend of at least 3%.
This means that if their holdings experience dividend cuts, they can still be kept within
the portfolio.
Although these metrics will occasionally trigger the replacement of a stock, the possibility
is still there for SDIV to hold onto losing stocks.
So overall, SDIV works to build a high yield portfolio, but it comes with significant risk.
The equal weighting of the portfolio will help balance this risk a little bit, but as
you’ll see by the numbers, it doesn’t do enough to protect investors’ wealth or
grow their monthly dividends.
You may think that by generating about 7% per year in dividends, you’d at least earn
7% returns on an annualized basis.
But this simply isn’t the case, and the SDIV returns speak for themselves.
Since the fund’s inception, SDIV has produced average annualized returns of less than 2%.
If that wasn’t bad enough, these are pre-tax returns.
According to Fidelity, post tax returns would put you at about -1% per year.
This is because despite paying out dividends every month, the SDIV stock portfolio struggles
to maintain its value.
Even before the pandemic there was a clear downtrend, and this really speaks to the methodology
behind SDIV.
As we said, the problem is that SDIV is building a portfolio around what are going to be riskier
stocks, simply because they’re trying to achieve a high dividend yield.
Even though this delivers monthly cash flow to investors, it results in terribly low and
potentially even negative returns over time.
This verifies that the methodology is insufficient in delivering total returns or selecting winning
stocks.
Ultimately, the depreciation in stock price is going to outpace returns through dividends,
and that’s a big red flag for investors.
Taking a closer look at the SDIV dividends and their tax treatment will really drive
this home and show you just how hard it is to benefit from holding this fund.
For starters, SDIV is a regular user of return of capital, at around 15% of each dividend
on average.
This means they’re actually returning a portion of your initial investment to you
with each dividend.
This is a concern with SDIV because they’re consistently falling short of their desired
dividend distribution and replacing it with your initial capital.
Since the NAV of the fund has not been growing over time, this practice could eventually
drain the fund and threaten future dividends.
Additionally, the inclusion of international stocks in the SDIV portfolio is bad for investors
paying taxes in the US.
Dividends paid by international stocks typically aren’t eligible for the qualified dividend
tax rate, and are instead taxed as income.
So instead of the long-term capital gains tax rate, they’ll receive the short-term
capital gains tax rate.
We can get a better idea of what this means with SDIV by looking at last year's tax report.
In 2020, SDIV paid about $1 in dividends per share.
This includes about 12 cents of return of capital, which isn’t immediately taxed.
But, only about 42 cents of the remaining dividend distribution is qualified dividend
income.
This means just under half of the dividend will be taxed as income at the short-term
capital gains rate.
All of this makes it very difficult to secure meaningful returns from SDIV.
A portion of every dividend is not actually made up of dividends, but your initial investment,
and another significant portion will be taxed at the higher short-term rate.
When you combine this with SDIV’s historically poor returns, I don’t think it’s any exaggeration
to call this one of the worst dividend ETFs available.
But just because I wouldn’t personally invest in SDIV, it doesn’t mean there isn’t something
to be learned here.
In fact, I think SDIV teaches a valuable lesson in chasing yield.
When I started investing, the prospect of earning dividends was probably the most exciting
part of the process.
It wasn’t long before I looked for stocks to invest in specifically based on their dividend
yield.
I’m sure this is a common mistake that many beginner investors make, because passive dividend
income is so appealing.
It’s easy to justify it when you’re picking individual stocks, because you can say you’ve
done your research or you believe in the company long-term.
However, SDIV shows that the process of selecting stocks based on yield can be very dangerous
for long-term returns.
Although a high yield alone isn’t a red flag, deeper research is usually needed to
vet the quality and sustainability of a dividend.
Most beginners, including myself when I was seeking yield, don’t do enough to vet these
dividend stocks - and neither does SDIV.
Another interesting lesson here is that not all diversification is good diversification.
There are a variety of studies out there that suggest upwards of 20, 30 or 50 stocks creates
a sufficiently diversified portfolio.
With 100 different holdings, SDIV appeared to check that box.
However, when we dug deeper, we saw that the number of holdings alone did not produce enough
diversification to capture the market’s performance.
One issue with SDIV is that it’s heavy into real estate and therefore underweight in other
market sectors.
So beyond the number of holdings, I think SDIV gives a good reminder to look at the
bigger picture of your portfolio, including sector allocation, market cap allocation and
international diversification.
And finally, I think SDIV teaches the importance of doing your research.
It’s easy to take a quick look at dividend yield or year-to-date performance before throwing
something into your portfolio.
But, taking a closer look at the strategies at play is super important if you want to
hold something for the long-term.
Especially if you want to make sure that holding aligns with your goals and can help you reach
them.
I’m also a big believer in using investing platforms that support these goals, which
is why I’ve been using M1 Finance more and more lately.
For passive, long-term investing and dividend reinvesting, I cannot recommend it enough.
If you want to check it out, there’s a link in the description that will give you $50
for creating and funding an account.
And with that, as always, I’d love to hear from you in the comments, and I hope to see
you back here for the next video!