SDIV: Chronic Underperformance To Worsen As Global Economic Stagnation Spreads

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Businessman On Wrong Side


Over nan past year, stocks and ETFs that took important hits during 2020 person fallen moreover lower. While nan world system is not needfully successful a "recession," it has fallen into a chronically stagnant maturation state. Most developed countries' existent GDP has not risen since 2019, pinch immoderate expecting declines this year. This move is atypical successful that nan world system is not experiencing a accelerated but short-lived contraction but a long, drawn-out play of consolidation. The shape is akin to nan 1970s to early 1980s, wherever quickly rising prices and debased accumulation maturation led to prolonged economic stagnation.

I judge investors should return statement of this inclination arsenic it drastically changes nan consequence and reward situation facing astir companies. In general, I fishy liking rates will stay elevated successful nan US for a prolonged play and proceed to emergence successful most different "developed" economies. This is simply a challenging situation for businesses, but pinch nan likelihood of a very crisp economical contraction debased (compared to a likelier prolonged stagnation), only nan worst-performing companies are apt astatine consequence of bankruptcy. Instead, mean ostentation and liking rates should compress profit margins and limit income maturation - trends that jeopardize companies struggling pinch precocious leverage aliases competitory pressure. In nan market, this inclination will apt mean nan worst-performing stocks will proceed to descent since location is nary cyclical economical betterment (or supportive monetary shift) to boost them.

This taxable is discussed successful galore of my caller single-stock articles but is besides applicable to a fewer ETFs. Specifically, those ETFs that predominately ain battered-down companies. Even stocks pinch debased "P/E" ratios whitethorn autumn little arsenic their net prospects look challenges. One notable illustration is apt nan ultra-high dividend ETF SuperDividend (NYSEARCA:SDIV). SDIV is very celebrated among income investors owed to its 14% trailing output and world exposure. While location is simply a batch to for illustration astir SDIV, I judge nan money will apt proceed to pain much worth than it generates until nan world economical situation changes.

The Core Issue successful SDIV's Strategy

I covered SDIV past astir nan end of 2020 arsenic nan ETF was recovering from its monolithic COVID crash. At nan time, I warned investors that its trailing output was not suggestive of its existent output owed to expected dividend cuts and losses arsenic companies reeled from nan global-lockdown recession. Although SDIV did emergence for a while aft that article was published, it has mislaid 25% of its worth since adjusted to 6% aft dividends. Like nan world economy, SDIV is experiencing a "double dip" drawdown; however, I judge it is amended described arsenic a "dip" followed by a prolonged antagonistic trend. The money has intimately tracked nan US ISM PMI scale and nan US output curve. See below:

ChartData by YCharts

Although only ~29% of SDIV's assets are US-based, its capacity is intimately tied to nan wide US system since virtually each world economies are highly US-dependent. Historically (1,2), nan output curve and nan US manufacturing PMI are stellar economical indicators. I judge nan output curve is simply a amended parameter of prolonged basal economical changes, while nan manufacturing PMI measures quicker cyclical economical changes. With nan output curve arsenic inverted arsenic it is, much important liking complaint cuts are expected complete nan adjacent decade. Investors are dramatically discounting longer-term bonds, truthful enslaved investors do not expect beardown economical capacity for years to come. On nan different hand, pinch nan PMI beneath 50, astir US manufacturing businesses are cutting-back today.

SDIV's highest successful 2021 coincided pinch nan emergence successful these indicators, but SDIV whitethorn not scope a trough moreover if nan indicators do. With nan US and world system successful a strained environment, galore companies successful SDIV will apt spot net descent complete nan coming twelvemonth aliases years. Indeed, SDIV has faced this rumor moreover successful much important economical periods. Since its inception, SDIV has mislaid 64% of its value, aliases 20%, aft accounting for dividends. SDIV's dividend has besides fallen by astir 36% owed to important dividend cuts from galore of its constituents. Even successful 2013-2019, nan ETF struggled to present accordant affirmative returns, chiefly owed to companies' abysmal quality, making it among nan less ETFs that deliver antagonistic alpha pinch comparative consistency.

In my view, nan halfway rumor pinch SDIV is that it is powerfully biased toward companies making mediocre financial decisions. Its "strategy" is to bargain nan highest dividend-yielding stocks worldwide, pinch comparatively fewer value measures beyond liquidity. In general, these are beaten-down companies that waste and acquisition astatine debased "P/E" ratios; SDIV's existent weighted mean "P/E" is only 6.5X. The astir extended assemblage vulnerability is financials and existent property (around 50% of its assets), which utilize greater leverage and person much cyclical exposure, peculiarly those pinch nan highest yields for illustration owe REITs. Further, astir 21% of its assets are situated successful China (Hong Kong aliases mainland), which, successful my experience, carries much important risks owed to weaker transparency successful China's financial strategy and governmental pressures. Hence, astir Chinese stocks, peculiarly financial ones, person gone nowhere for decades.

In theory, ultra-low valuation companies tin beryllium awesome investments, peculiarly during economical recoveries. However, SDIV disproportionately invests successful battered-down companies that still salary important dividends. In astir cases, it is unwise for financially struggling companies to salary precocious dividends, arsenic that will often exacerbate equilibrium expanse issues. Further, investors whitethorn beryllium disproportionately attracted to companies pinch 10%+ dividend yields, causing them to go overvalued contempt their precocious business risks.

The Bottom Line

SDIV is simply a chronic underperformer among high-dividend ETFs. In my view, this is owed to nan inherent action bias of ultra-high dividend stocks, causing nan ETF to ain companies making jeopardizing business decisions. Put simply, astir companies that waste and acquisition astatine "P/E" ratios beneath 7X are not usually successful a sufficiently patient financial position to salary precocious dividends. Hence, SDIV's constituents thin to trim their dividends complete clip and diminution successful value. Although SDIV's precocious output tin dress up for its depreciation, it usually fails to do so. Further, successful nan existent economical environment, I judge SDIV's constituents are apt to trim their dividends and depreciate faster than usual.

SDIV's TTM output is 14.3%, but its SEC yield (or nett output based connected astir caller dividends) is 11.6% owed to caller dividend cuts. Considering its constituents thin to trim dividends (particularly nether economical strain), today's investors successful SDIV will apt person a output beneath 11.6% complete nan adjacent year. Historically, SDIV is simply a chronically mediocre investment, astir apt owed to its action bias, but truthful I mostly judge investors should debar nan fund; however, I americium peculiarly bearish connected SDIV coming because I deliberation nan "stagflationary" and "high-interest rate" economical situation should create excess strain for nan riskiest financial and existent property stocks - which SDIV is highly exposed to. Over nan adjacent 12 months, I fishy galore of those companies will acquisition important net declines and imaginable solvency issues, peculiarly those situated successful much opaque markets for illustration China and Brazil (14% of SDIV's assets).

Better Alternatives to SDIV

Investors willing successful high-yielding ETFs whitethorn find amended luck successful circumstantial sectors that salary beardown yields pinch little consequence exposure. In my opinion, US power infrastructure companies, specified arsenic those successful nan ETF AMLP, are a amended stake today. AMLP's dividend is person to 8% coming and has risen pinch nan fund, but immoderate power MLPs do salary dividends complete 10%. While this manufacture is historically risky, I judge nan caller stabilization of nan US power sector's maturation should lead to decent support and little volatility for years. Of course, pinch liking rates arsenic precocious arsenic they are, short-term 1-5 twelvemonth finance people firm bonds, specified arsenic those in IGSB may connection superior risk-for-reward.

Fundamentally, pinch liking rates arsenic precocious arsenic they are connected low-risk investments, high-risk dividend stocks are comparatively anemic investments, peculiarly considering galore of SDIV's constituents are apt seeing rate flows gaffe due to higher liking payments. For example, pursuing caller complaint hikes, nan short-term firm enslaved ETF (IGSB) pays a output is complete 5% today, and it carries comparatively debased in installments consequence and little liking complaint consequence now that nan Fed's discount complaint is peaking. With nan output curve adjacent record-inversion, I judge income-seeking investors should return advantage of (much) lower-risk moderate-yield opportunities astatine nan short extremity of nan enslaved curve.

This article was written by

Harrison Schwartz floor plan picture

Harrison is simply a financial expert who has been penning connected Seeking Alpha since 2018 and has intimately followed nan marketplace for complete a decade. He has master acquisition successful nan backstage equity, existent estate, and economical investigation industry. Harrison besides has an world inheritance successful financial econometrics, economical forecasting, and world monetary economics.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga

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