CGDV: Actively Managed Dividend ETFs Outperform the Market (NYSEARCA: CGDV)

investment thesis

The purpose of this article is to initiate an analysis of the Capital Group Dividend Value ETF (NYSE:CGDV), a 19-month-old actively managed fund that outperformed the SPDR S&P 500 Trust ETF (SPY) by 6.80% while costing less volatility. While most of the growth occurred last year, CGDV has kept pace with SPY in 2023, an impressive feat for a dividend fund in a strong bull market. In this article, I’ll evaluate Capital Group’s unique multi-manager structure, compare its fundamentals to passive alternatives, and judge whether CGDV is worth owning at this time.

CGDV Overview

Manager profile

CGDV may be new, but Capital Group is not. Founded in 1931, Capital Group is “one of the largest investment managers, managing more than $2.2 trillion,” according to its website. A brief description of the company’s general investment methods is as follows:

A unique feature of Capital Group is its multi-manager structure, each with a specific background, style and approach. In the case of CGDV, five portfolio managers are listed in the fund’s statement of additional information.

Christopher D. Buchbinder also co-manages two other registered investment companies with total assets of $328.8 billion as of May 31, 2023. The largest of these is the American Growth Fund (CGFAX), for which Capital Group is an adviser. Mr. Buchbinder brings 27 years of Capital Group experience to CGDV. Martin Jacobs, James B. Lovelace, Keiko McKibben and James Terrile have a combined 132 years of investment experience, 73 of which have been with Capital Group. I start this way because I don’t want readers to get the impression that CGDV is some kind of experimental ETF. It is run by industry veterans who are intimately familiar with the capital system and each other.

As mentioned earlier, CGDV has a multi-manager structure. Based on the bio linked above, I’ve listed each manager’s areas of expertise below:

• Buchbinder: Telecommunications Companies, Automobiles, Automotive Parts and Equipment
• Jacobs: Industrial machinery and electrical equipment
• Lovelace: beverages, tobacco, restaurants, home/personal products
• McKibben: Aerospace and defense, IT, machinery, business services
• Terrile: Healthcare supplies and equipment, pharmaceuticals, biotechnology

There appears to be very little overlap, which is ideal. However, from an industry perspective, expert coverage of energy, finance, materials, real estate and utilities is missing, or at least not prominently mentioned on Capital Group’s website.

strategy discussion

CGDV’s stated investment objective is to “generate income that exceeds the average return on U.S. equities and provides opportunities for principal growth consistent with sound common equity investments.” The fund invests primarily in U.S. large-cap stocks, but can hold up to 10% of assets outside the United States. Other fund information is below.

As shown, dividends are paid quarterly in March, June, September and December, and the ETF’s assets under management have grown to $3.13 billion since its launch on February 22, 2022. Portfolio turnover in the most recent fiscal year was 30%, well below what I would expect from an actively managed fund. This number shows that managers have a high level of conviction and are not pursuing short-term profits. While having strong convictions is admirable, it can get you into trouble if you fail to recognize changing market conditions. However, CGDV’s multi-manager structure should alleviate this problem, as each manager is responsible for only a portion of the fund.

CGDV has an expense ratio of 0.33%, which is reasonable but goes against its primary goal of providing shareholders with above-average income. The goal of providing a yield above that of the benchmark S&P 500 Index is not an ambitious one, and the 0.33% fee is a large portion of the dividend income generated by the fund’s underlying holdings. It doesn’t look like a suitable product for income investors without significant dividend growth, which I will evaluate later.

Sector exposure and top ten holdings

The table below highlights the industry exposure of SPY, CGDV, and the Vanguard Dividend Appreciation ETF (VIG). I chose VIG as a comparator because it has a slightly higher yield than SPY and is an established dividend fund with lower fees.

CGDV does not hold any REITs, suggesting that its distributions should be largely qualified for tax purposes. Relative to SPY, it is overweight industrials by 12.39%, which may be a coincidence or may reflect the portfolio manager’s area of ​​expertise. Mr. Jacobs holds a bachelor’s degree in industrial and systems engineering, while Ms. McKibben has a background in analyzing aerospace and defense stocks at CGDV. The ETF holds RTX Corporation (RTX) and General Dynamics (GD), with a combined industry weight of 5.67%, ranking fourth behind semiconductors (12.37%), tobacco (6.35%) and systems software (5.78%). While I can’t say for sure that managers seem to prefer investing in what they know, I think most investors share this bias.

The top ten holdings held by CGDV are as follows, together accounting for 42.04% of the portfolio. The fund is led by Broadcom (AVGO), Microsoft (MSFT) and American International Group (AIG), with yields of 2.17%, 0.91% and 2.31% respectively. We can infer that fund managers do not screen stocks based on their returns relative to the S&P 500. Instead, managers can maintain flexibility in investment choices as long as the portfolio’s net return is satisfactory.

There are 54 holdings listed, but only 49 stocks. The most important cash position is Capital Group Central Cash Fund (CMQXX) at 4.04%, which has a 30-day SEC yield of 5.39%.

Performance

Unfortunately, CGDV doesn’t have much of a track record yet. However, since March 2022, it has grown at an annualized rate of 6.81%, outperforming SPY and VIG by 4.18% and 3.56% annually, respectively.

Even better, CGDV has kept pace with SPY in 2023 (16.63% vs. 17.06%). I can only find two large-cap dividend-oriented ETFs in the same universe: Siren DIVCON Leaders Dividend ETF (LEAD) and Franklin US Core Dividend Tilt Index ETF (UDIV). LEAD and UDIV are overweight technology stocks by 34% and 31% respectively, so this should come as no surprise. However, they were also the second- and third-worst performing dividend ETFs in 2022, so CGDV’s performance was far more impressive.

CGDV analysis

Industry segmentation

With only 49 stocks, CGDV doesn’t offer much diversification. However, the fund made a reasonable attempt at allocating to 34 industries. I’ve listed the top 25 stocks below, covering 90.77% of the portfolio, as well as the top 2 stocks in each industry (if applicable).

From an industry level, diversification is not bad. Other successful ETFs have more than 90% of their assets in the top 25 industries, including the Schwab U.S. Dividend Stocks ETF (SCHD), which has 92.91% of its assets. So, while not ideal, I don’t think this precludes CGDV from qualifying as a core holding. However, it may work best as a supplemental fund.

CGDV Fundamentals by Company

The table below highlights selected fundamental metrics for CGDV’s top 25 holdings, which together represent 71.15% of the portfolio. I’ve also included summary metrics for SPY and VIG in the bottom row.

Some observations:

1. CGDV’s five-year beta of 1.06 is notable because it’s not your typical dividend-oriented fund. Looking at my ETF database, there are only a few with 5-year betas (based on current holdings) above 1.00 and weighted average market caps above $100 billion, including:

• Siren DIVCON Leading Dividend ETF: 1.11
• RiverFront Dynamic U.S. Dividend Advantage ETF (RFDA): 1.10
• Free Day Dividend ETF (MBOX): 1.06
• FlexShares Quality Dividend Index Fund (QDF): 1.04
• Franklin U.S. Core Dividend Tilt Index ETF: 1.03
• Fidelity High Dividend ETF (FDVV): 1.02
• iShares Core Dividend ETF (DIVB): 1.00

With the exception of MBOX and DIVB, all of these funds have outperformed the dividend ETF average this year, a statistic that supports their higher betas. While the data also suggests that they will fall in line with the market during a downturn, the reality is more complicated than that. For example, MBOX and FDVV, which had yields of 2.77% and 3.39% last year, performed much better than funds with lower yields such as LEAD. Sector composition and market sentiment toward growth/value stocks may be better indicators.

2. The weighted average return of CGDV constituent stocks is 2.34%. After deducting fees, investors’ net return is approximately 2.01%. The fund’s trailing dividend yield is only 1.63%, but I believe that has to do with how new it is. Early shareholders often experience dividend dilution because funds typically grow at their fastest rate (percentage) in the early years. Simply put, an ETF can only distribute income received, and if the ETF’s outstanding shares increase significantly before the ex-dividend date, it must share a fixed share with more investors, resulting in a lower dividend per share. Based on the history below, dividends are starting to stabilize. The most recent quarterly payment was $0.1186, yielding a yield of 1.73%, and I expect the yield to be even higher next quarter.

3. CGDV’s constituents have only grown 5.35% annually over the past five years, well below the double-digit dividend growth provided by VIG. Since CGDV’s yield is on the low end, I’d expect this stat to make up for it from a revenue perspective. Unfortunately, I don’t think it’s attractive to income investors, which is odd given the fund’s investment objectives.

4. CGDV’s combination of sales growth, EPS growth, and valuation (forward earnings and trailing cash flow) is slightly more attractive compared to VIG. Compared to SPY’s projected EPS growth rate of 8.69%, this is only 1.01% lower, but its projected earnings valuation is 5.10 points cheaper (20.94x vs. 26.04x). I like this setup, although it’s not necessarily better than VIG, especially since it’s much less diverse. There is the potential for underperformance if some key sectors fall out of favor, and I’m not yet sure how quickly managers will adapt to changing markets. Keep in mind that last year the portfolio turnover rate was only 30%.

5. CGDV has a Seeking Alpha Profit Score of 9.21/10, which I calculate on a weighted average basis using individual Seeking Alpha profitability levels. However, it is similar to VIG’s 9.22/10 score and SPY’s 9.35/10 score. Of the 28 dividend ETFs I track with market caps over $100 billion, the average score is 9.04, so nothing special. Many high dividend funds have lower scores (e.g. DHS, FDV), but SCHD is a notable exception with a score of 9.48/10. Still, at least CGDV doesn’t seem to be sacrificing quality for volume, as that’s been a reason for long-term underperformance.

Investment Advice

My initial view on CGDV is favorable. I like Capital Group’s multi-manager structure and the fact that the five managers running the fund have different backgrounds, areas of expertise and styles. They proved themselves last year, with CBDV outperforming the market, as you’d expect from a value-oriented fund. What’s even more impressive, however, is how they’ve kept pace with SPY this year in an environment seemingly reserved only for growth stocks. My main criticism is that CGDV is not designed for income investors. Based on its current holdings and expense ratio, I expect a dividend yield of just 2.01% and weak dividend growth. Simply put, it’s no substitute for the rare income/growth potential combination offered by ETFs like VIG or SCHD.

Still, that’s not to say it’s not a good value fund. I think so, and while I typically reserve judgment on a new fund until it becomes more mature, the Capital Group team is as entrenched in the investment management industry as you could ask for and I respect their experience. Therefore, I rate CGDV a Buy and look forward to covering the fund more regularly from now on.