Torsten Asmus
iShares Core Dividend ETF (BATS:DIVB) focuses on owning stock in companies that pay dividends and implement share buybacks. This ETF has about $361 million in assets under management and offers an extremely low expense ratio of 0.05%. The 30-day SEC yield is just over 3%. Since its inception in November 2017, this fund has returned just over 12% annually. The one-year and five-year performance numbers are even better with one-year total returns of just over 22% and five-year returns averaging nearly 13.5% annually. I think the strong recent gains can continue, making this an attractive ETF holding, so let’s take a closer look:
The Chart
As the chart below shows, this ETF bottomed out in late October 2023, and it has since been in a solid uptrend. It has been paying off to buy the dips for several months, and I expect that trend to continue. The 50-day moving average is $43.26 and the 200-day moving average is $40.20. The current share price is just barely above the 50-day moving average. I would use pullbacks close to, at, or below the 200-day moving average as buying opportunities.
StockCharts.com
Top Ten Holdings
As shown below, this ETF holds a significant position in a number of well-known dividend stocks:
Source: Seeking Alpha
Let’s take a closer look at the three largest holdings:
Broadcom (AVGO) is a semiconductor company that is benefitting from demand from AI and other chips. This stock has had a big run in the past year, and it just announced a 10-for-1 stock split. It also announced better than expected results for Q2 2024, which sent the stock to new highs in after hours trading. Broadcom shares are trading for more than 30 times earnings, so the valuation is getting a bit rich, but I like the management team and the CEO is definitely executing well. Broadcom could keep posting strong results due to the demand for AI and other advanced chips. This stock represents just over 5% of the portfolio holdings.
Cisco Systems (CSCO) is a top-tier network equipment company that was once richly valued, but now it is a value stock. It trades for just around 12 times earnings and offers a yield of about 3.5%. Cisco Systems represents about 4.4% of the portfolio. The dividend has been raised for 12 years and with a payout ratio of just around 39%, there appears to be plenty of room for additional dividend increases.
Qualcomm (QCOM) has focused on chips for smartphones and appears poised to benefit from a refresh cycle that could come as consumers upgrade to the next generation of AI-enabled smartphones. This stock has been in an uptrend, but it is still reasonably valued at around 20 times earnings. This stock has a dividend yield of about 1.6%, and the dividend has been increased for 20 years. Qualcomm represents about 3.44% of the portfolio.
While many of the top holdings are tech stocks, this ETF also has many other holdings that diversify it and could act as a hedge. This includes energy stocks like Exxon Mobil (XOM) and Chevron (CVX), as well as consumer staple heavyweights like Procter & Gamble (PG).
The Dividend
The dividend totals $1.24 per share on an annual basis, which provides a yield of around 4%. The dividend has been increased for 6 years, and what is impressive is the fact that the 5-year growth rate is over 16%.
Why DIVB Could Continue To Offer Strong Total Returns
On June 12, 2024, the Federal Reserve released its “Summary of Economic Projections”, in which it projected the Fed Funds rate could drop from about 5% currently, to just around 3% in 2026. I feel this is a strong potential tailwind for both tech stocks and dividend stocks. Lower interest rates can boost the valuation of tech stocks since they are long duration assets. This is because tech stocks rely more on future earnings, and this makes tech stocks highly sensitive to interest rates. Dividend stocks are also highly sensitive to interest rates and tend to rise in value as yields decline. The Federal Reserve’s projections for lower rates between now and 2026, could benefit the dividend and tech exposure that this ETF offers.
With these potentially strong interest rate tailwinds and with growth from AI which could cause an upgrade cycle in everything from smartphones to PCs, the portfolio holdings of this ETF could continue to increase in value.
What I Like About DIVB
This ETF has offered strong total returns over the past year and past 5 years. It has also done well since inception. I like that you are getting a yield of about 3%, plus exposure to some of the higher-yielding and faster growing stocks in the tech sector. In addition, this ETF has steady dividend growth and buyback stocks in the energy and consumer staples sector. I see it as an ideal portfolio mix with balance that could continue to work in the future. I also like that there are no outsized positions in this ETF, since the largest holding is just around 5%. This reduces portfolio risks for investors.
Potential Downside Risks
Of course, there are macro issues that could be potential downside risks for this ETF, this includes a stock market correction, geopolitics and continued trade tensions between the U.S. and China. There are also more specific risks to owning this ETF, which I primarily see as being valuation. Some of the consumer staple stocks in this portfolio are trading for more than 20 times earnings, and these companies are not growing fast for this type of valuation. On the other hand, some of the tech stocks in this ETF, like Broadcom, have seen strong growth, but the valuation is also getting rich. This could lead to downside if growth rates start to slow in the future.
In Summary
I think the ETF is an ideal portfolio holding due to its low expense ratio, a 3% yield, and solid performance in terms of total returns. With the Federal Reserve continuing to forecast lower rates between now and 2026, this could be a solid tailwind for the tech and dividend stocks held by this ETF. Finally, the strong demand for AI-enabled tech products could be another added bonus.
No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
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