The SPDR S&P Global Dividend ETF (NYSEARCA:WDIV) might be a fund of choice for investors who would like to collect dividends from all over the world while maintaining a solid footprint in the U.S. equity universe. The ETF boasts multiple advantages from a relatively comfortable gross expense ratio of 0.4% and the standardized yield of 4.1% to exposure to a cohort of equities from and outside of the U.S. that have been increasing their annual dividends consistently for at least 10 years (unfortunately, with caveats).
Anyway, I am still skeptical about this investment vehicle for a few reasons discussed below.
The Underlying Index: Rules Meaningfully Relaxed
The S&P Global Dividend Aristocrats Index represents the basis for WDIV's investment strategy. To construct the benchmark, S&P Dow Jones Indices uses the Global Broad Market Index as a starting point and then whittles it down to just one hundred stocks that meet somewhat strict criteria (depending on what we are comparing them with) on market capitalization (higher or equal to $1 billion), liquidity, listing, yield, and dividend growth. On a side note, real estate investment trusts can also compete for the place in the benchmark together with stocks.
So, what can go wrong? The issue is that the index provider has different definitions for U.S. and international dividend aristocrats.
Investors who expect to see a cohort of companies that have been increasing their annual payouts for decades despite a few recessions in the WDIV security basket should curb their enthusiasm. S&P Dow Jones Indices significantly lowered the bar for dividend growth, thus almost fully eliminating the appeal of an aristocrat status. The prominent 25-year DPS growth rule that made the S&P 500 aristocrats index famous does not apply to the holdings of WDIV. Instead, as the index provider explained on page 5 of the methodology, to be eligible for inclusion, a company must increase its dividend for ten years or maintain stable dividends for the same period, which means some constituents might have no DPS growth history at all. The corollary here is WDIV simply does not have NOBL's recession-immune reputation. Put another way, most WDIV holdings are essentially dividend achievers (~10 years of DPS growth or more) at best.
How The Index Provider Identifies The Lowest Quality Stocks
Dividend indices all face one and the same complex question: how to identify value and yield traps? Ignoring companies that are approaching a dividend reset can take its toll on both fund's income and capital appreciation.
So the index provider incorporated two quite simplistic criteria related to the size of the yield: names yielding more than 10% cannot join the benchmark, and also to the dividend coverage: the payout ratio must be above zero (put another way, a company must be at least thinly profitable). Also, if a company's DPS is greater than EPS (the PR above 100%), it will be removed from the list.
It is worth clarifying that the payout ratio is computed using earnings per share and dividend per share, and cash flow-based ratios are not taken into account. That is one of the key vulnerabilities of the methodology given accounting earnings are not always indicative of a company's dividend sustainability.
Holdings Analysis
As of May 26, WDIV had 100 constituents. I would not say that the fund is top-heavy since its ten largest holdings account for just 17.3% of the NAV. The ETF's value tilt is intuitively evident since it uses indicated dividend yield for weighting.
Unfortunately, its exposure to the S&P 500 dividend aristocrats is limited, and there are two reasons for that: the dividend-yield-weighted methodology and the 100 stock limit.
At the moment, WDIV is long four S&P 500 constituents that have been increasing their DPS consistently for at least 25 years, namely Exxon Mobil (XOM), AT&T (T), International Business Machines (IBM), and People's United Financial (PBCT).
Toronto-listed Keyera Corp. (OTCPK:KEYUF), a Canadian energy infrastructure company, is WDIV's most significant equity investment at the moment, with a weight slightly north of 1.92% which is way below a single-stock weight cap of 3%. Exxon Mobil, an oil supermajor and dividend aristocrat, is in second place with almost the same share of the NAV.
Most of the fund's net assets, or 24%, are allocated to Canada. The U.S. is in second place with a 23.7% share of the NAV, followed by Japan with its 11.9% weight.
Regarding sector mix, WDIV has a material footprint in financials that are supposed to benefit from the economic recovery. This sector accounts for 26% of the net assets, which, if still remains above 25%, will be trimmed upon next rebalancing. The fund's exposure to defensive sectors is also quite large, with utilities and consumer staples being the second- and fourth-largest allocations with 17.7% and 10.5% weights, respectively.
Distributions
WDIV has been distributing income since June 2013. In total, it has made 32 distributions since then. Surprisingly, despite the global dividend reset precipitated by the pandemic, its highest quarterly distribution to date (~$1.357) was made in December 2020. For some reason, the fund reported that it also distributed both short- and long-term capital gains last year, but the amount of both was equal to zero.
Despite its focus on equities with long-term dividend growth, the fund has a rather spotty history of distributions. But while the consistent growth trend is not observable, distributions it made in 2020 are 1.2x higher than in 2014 and 1.17x higher than in 2019. Assuming the most recent dividend of ~$0.426, investors who bought WDIV in January 2014 are now enjoying an over 5% yield-on-cost.
Brief View on Total Returns
Though 5-year returns are rather drab if compared to the S&P 500 (SPY) given the fund's value tilt, this year, WDIV has been doing nicely, thanks to the capital rotation from richly valued tech names to cyclical players that are supposed to benefit from reinvigorated economic activity across the globe.
It has not only trounced its peers the SPDR S&P International Dividend ETF (DWX), iShares International Dividend Growth ETF (IGRO), and iShares International Dividend Select ETF (IDV) but also outperformed the S&P 500.
Final Thoughts
WDIV does have a few solid advantages. First and foremost, it combines both U.S. and global dividend-paying equities, making an interesting blend with a rather optimal risk dispersion. Second, its standardized yield of 4.1% is not to be forgotten. For a rock-bottom interest rate environment, with only little hope that bond yields go up anytime soon, that level seems juicy enough. Third, the WDIV investors have only limited exposure to emerging markets (China is the largest EM allocation with only 4.2% weight), which makes the fund less vulnerable to the headwinds stemming from the FX volatility, and, hence, rather optimal for the USD bulls and EM skeptics.
However, the essential problem I see here is that most of its constituents are, in fact, not even near dividend aristocrats if compared to the NOBL cohort. Their dividend histories are simply incomparable. So, investors who would like to see a more recession-proof, time-tested product should not expect a NOBL-like level of quality and resiliency in the case of WDIV.
Vasily Zyryanov
Vasily Zyryanov is an individual investor and writer.He uses various techniques to find both relatively underpriced equities with strong upside potential and relatively overappreciated companies that have inflated valuation for a reason.In his research, he pays much attention to the energy sector (oil & gas supermajors, mid-cap, and small-cap exploration & production companies, the oilfield services firms), while he also covers a plethora of other industries from mining and chemicals to luxury bellwethers.He firmly believes that apart from simple profit and sales analysis, a meticulous investor must assess Free Cash Flow and Return on Capital to gain deeper insights and avoid sophom*oric conclusions.While he favors underappreciated and misunderstood equities, he also acknowledges that some growth stocks do deserve their premium valuation, and its an investor's primary goal to delve deeper and uncover if the market's current opinion is correct or not.
Analyst’s Disclosure: I am/we are long XOM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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