If dividend investors are looking for a cheap ETF to complement their high-yield holdings, I believe the Cambria Shareholder Yield ETF (SLD) deserves consideration. This ETF, which selects US small-, mid-, and large-cap stocks based on share buybacks and dividends, transitioned to active management in June 2020 and has since delivered impressive results against the S&P 500. J likes the active factors managers use to value stocks, which include leverage and valuations, and SYLD gives investors a way to participate in bull markets in a fundamentally sound way. This article will further explain why by comparing it to a popular dividend ETF that many readers already hold: the Schwab US Dividend Equity ETF (SCHD).
Presentation of the ETF
Fundamentals of Strategy and Funds
The combination of a company’s dividend payouts and stock buybacks is called shareholder yield, forming the complete picture of “total cash distributed” that I find necessary to examine these days. According to the chart below, redemptions now exceed dividend distributions for S&P 500 stocks.
The main benefit of including buyout yield in the selection process is that it gives company management more flexibility in distributing cash to shareholders. Also, since it’s not expected the way dividend payouts are, there won’t be much retaliation if redemptions don’t increase year on year. That’s precisely the point, too. We hope company insiders know more about their operations than the investing public, so it’s reasonable to assume that most buybacks will occur when the stock is undervalued.
There are also two drawbacks to this method. First, cash distributions will be much lower than dividend investors want. Second, the strategy is likely to perform better in bull markets. The reason for this is that most stocks are likely to be undervalued relative to future prices in bull markets. In contrast, SYLD will hold companies that have repurchased shares at inflated prices in bear markets, thereby destroying shareholder value.
Now, SYLD is doing its best to protect against this by using the rating, quality, and leverage screens, as described below. This graphic appears in Cambria’s Investment case, but I don’t know to what extent it is used today. In June 2020, SYLD moved to an active management strategy, so the process is probably not as strict anymore.
Nonetheless, it remains a fund of 100 stocks, and I’ve summarized some of SYLD’s key stats below for easy reference:
- Current price: $65.12
- Assets under management: $430 million
- Expense ratio: 0.59%
- Launch date: May 13, 2013
- Rolling dividend yield: 2.21%
- Three-year dividend CAGR: 20.58%
- Five-year dividend CAGR: 18.16%
- Dividend payment frequency: Quarterly
- Five-year beta: 1.38
- Number of titles: 101
- Portfolio turnover: 37.00%
- Assets in the Top Ten: 15.93%
- Median 30-day bid-ask spread: 0.14%
- Index tracked: none (active management)
As noted, historical dividend growth rates have been strong, offsetting the relatively low dividend yield of 2.21%. However, it has been quite volatile relative to the market, as indicated by its five-year beta of 1.38. It appears to be nearly evenly weighted as 15.93% of assets are in the top ten and the expense ratio of 0.59% is well above what most dividend investors consider reasonable. I believe I’m tough on high-fee, actively managed ETFs, but I’ll explain shortly how I think it might fit into the portfolios of most dividend investors.
Sector exposures and main holdings
SYLD has a different composition than most dividend ETFs and is notably overweight stocks in the consumer discretionary and financials sectors. I chose to compare its exposure areas with the iShares US Dividend and Buyback ETF (DIVB) ETF and SCHD because I know it is a staple holding in many readers’ portfolios.
As mentioned, SYLD’s top ten holdings are only 15.93% due to its roughly equal weighting methodology. They include Dillard (DDS), Apple (AAPL), and Louisiana-Pacific (LPX). It’s a small sample, but I feel like SYLD isn’t beholden to any particular style. I will show later how SYLD’s fundamentals are unique as most are highly volatile but have relatively low valuations.
Although SYLD was launched in 2013, I want to break down performance periods since its strategy changed in June 2020. First, here is how SYLD performed from June 2013 to May 2020, when it tracked an index based on rules replenished quarterly. You can see that the performance was unremarkable and underperformed the SCHD and the SPDR S&P 500 Index ETF (SPY) by 3.63% and 5.15% pa, respectively. The annualized standard deviation was also higher and SYLD had seen a much larger drop in the first quarter of 2020.
However, since switching to the active management strategy, SYLD has performed much better. It has gained 54.26% annualized vs. 30.90% for SCHD and 27.08% for SPY, and despite still-high volatility, its risk-adjusted returns are still the best.
Some of this success is likely down to luck, but I think the change was necessary because a valuable ETF shouldn’t be replenished as frequently. Value investing isn’t always about buying the cheapest stocks. You have to hold them, sometimes for a long time, to realize the real value of a stock.
I have summarized some selected metrics in the table below for SYLD’s top 20 industries. For comparison purposes, I have also included SCHDs to give dividend investors an idea of how they might fit into their portfolios.
Both ETFs have their advantages and are different enough to make good complements. For example, SYLD’s weighted average market capitalization is $71.5 billion and is heavily skewed by Apple’s valuation of $2.8 trillion. SCHD, on the other hand, is $127.6 billion, but Home Depot (HD) is the largest company by market capitalization at $373 billion. The ETF Research Center notes only an 8% weight overlap between the two funds, so at a minimum, it’s efficient capital allocation that partly justifies SYLD’s high fees.
The chart above suggests that SYLD has an advantage based on its constituents’ better dividend growth rate, lower dividend payout ratio, and higher estimated earnings and EPS growth rates. It is also significantly cheaper at 10.96x forward earnings and 1.82x trailing sales. This P/E valuation makes SYLD the third cheapest out of over 300 US stock ETFs that I have performed calculations for.
Where SYLD lacks, SCHD makes up for it, especially by being a consistent performer, having around 1% outperformance, having lower volatility, and generally being a safer choice due to its focus on equities. large-cap value companies. Finally, none of the ETFs are exposed to much earnings risk because their P/Es are so low. This is one of my concerns in this market since we’ve all seen what a bad earnings report can do to a stock like Netflix (NFLX) overnight.
Most market commentary focuses on the large-cap S&P 500 and Nasdaq-100 stocks, but I wanted to provide an update on some of the lesser-known names. The table below is a representative sample of the SYLD, with one company selected for each of the ETF’s top 20 industries.
I calculated that the median quarterly revenue and earnings surprise numbers were 3.85% and 11.90%, respectively. For companies reporting this quarter, the median EPS surprise was 5.99%, which is in line with the S&P 500, according to Search Yardeni. Clearly, earnings surprises are falling across the board, and I relate this to the poor year-to-date performance of high P/E stocks typically found in growth ETFs. By selecting two ETFs like SYLD and SCHD that both have low P/E ratios but different levels of volatility and profitability, investors can potentially outperform the S&P 500 in both bull and bear markets. For reference, SYLD’s net EPS review rating is B- versus C+ for SCHD, while SCHD has the edge on profitability (A- versus B).
I prefer SYLD as a complementary product for dividend investors, although it is far too volatile and arguably unproven to be considered a core holding. Nonetheless, it allows investors to capture excess returns in bull markets without relying on high-growth stocks. This feature is crucial as sentiment appears to be changing against these stocks if declining earnings surprises are any indication. SYLD also scores well on the Seeking Alpha earnings review ranking system.
SYLD’s move in June 2020 to active management was smart because it gives managers the flexibility to hold onto high-conviction plays rather than selling them too early based on a rules-based index. Remember that the shareholder return strategy is actually a value strategy, so past quarterly rebuilds were likely responsible for its poor historical performance. In short, SYLD pairs well with a well-established ETF like SCHD, and together I think they’ll beat the market going forward.