Investment thesis: This Oppenheimer ETF has been a great performer in delivering yield and capital growth for investors. While the underlying holdings offer diversified equity exposure, the emphasis on utility stocks might make some investors feel uneasy. Notwithstanding this, the 5.36% distribution yield is well established, and the fund has money saved for future use. Although quarterly distributions are less than ideal for retirees, RDIV can be a great pick for equity exposure and high current income.
Fund Overview – The S&P Ultra Dividend Revenue ETF (RDIV)
(Source: RDIV Factsheet)
This ETF has a unique revenue weighting investment strategy and focuses on deep value. Furthermore, with holdings in traditionally defensive sectors that pay high dividends, the fund seeks to deliver a high yield to investors. However, the trade-off for investing in high-yield sectors such as utilities and telecom has been largely flat performance over the past few years. A deep value strategy may be the key to unlocking both capital growth and high income within these conservative sectors.
Investing For Income
(Source: Original Image – Data from Yahoo Finance)
Notwithstanding the heavy emphasis on defensive sectors such as utilities and telecom, the fund managers have done a wonderful job of delivering yield. The 5.36% trailing 12-month yield is especially impressive without the benefit of using leverage. Although the ETF is still relatively new being launched in 2013, the quarterly distributions have been consistent over the past 6 years. A stable yield is something that should be very important to income investors such as retirees if they rely on their portfolios for living expenses. There is also the added benefit of tax-efficient income as a portion of the quarterly distributions are coded as qualified dividends.
Commentary On The Top Holdings
How it has earned yield and capital growth through astute stock selection and market timing
Overall, there is a lot to like about the fund’s underlying holdings if you want broad exposure to defensive equities. The utilities, consumer discretionary, and telecom sectors may not offer much growth potential from established companies, but I would think downside protection and income stability are high priorities if you seek to limit your portfolio’s volatility. However, notwithstanding that the fund focuses on mature, large-cap companies, the deep value approach can be very effective if they can time their purchases correctly. For example, with the benefit of hindsight, we now see that Macy’s (M) and CenturyLink (CTL) appearing in RDIV’s top holdings was a genius move. We will see what the future holds for these positions, but their fundamentals are certainly improving for the time being. This can be a catalyst for continued capital growth of the fund if the underlying companies continue to recover.
But Is The Distribution Sustainable?
(Source: Original Image – Data from latest semi-annual report)
According to the data available in the latest SEC reports, the fund managers have done a great job of not only delivering yield but also a sustainable one. It’s true that market conditions can change and that we are evaluating historical performance to predict the future, investment income and distribution coverage are key data points to consider. Throughout their operating history, the ETF has generated more than investment income from dividends alone to cover the distribution and save money. It is also impressive that they have been able to do this without the benefit of leverage. Accordingly, this ETF becomes more appealing to conservative income seekers because price should be more stable than other options like closed-end funds.
Historical Price Performance
The benefits of equity income – growth and income without being subjected to rising bond yields
(Source: Yahoo Finance)
Although past performance doesn’t guarantee future results, this ETF’s historical performance should be very encouraging for prospective investors. Compared to the more growth-oriented S&P 500 (SPY), RDIV has held its own very well over the years. Although it has felt the pain of the utility and telecom sectors, the high distribution has enhanced the total return and can afford buy and hold investors time to be patient. Although it might be unexpected, you can see that the fund has actually displayed just as much volatility and even lower drawdowns than SPY. Investors must also consider market sentiment. Growth stocks have outperformed value in the past 9 years and there is not much to suggest that will change going forward. Rising rates will put pressure on dividend-paying stocks as borrowing becomes more expensive and attractive yields can be earned on safer investments.
Asset Allocation Strategy
RDIV’s negative correlation to fixed allows you to take less risk with bonds
As a Modern Portfolio Theory purist, I have to talk about how RDIV will fit in your portfolio in relation to your other holdings. I simply have to. Looking at the fund’s historical performance in comparison to fixed income, the negative correlation is definitely encouraging. Why? Allocating money to bonds will smooth out your returns if you don’t want all equity exposure. Furthermore, the high yield of RDIV will allow you to not have to chase yield with bonds. This means you can focus on short duration, high-quality corporates, and treasuries. As such, you can save yourself from the pain of default risk and rising bond yields.
(Source: Yahoo Finance)
In summation, I really like this fund’s value proposition. Despite not being able to offer the same growth potential as other equities, the ETF does have a well-established distribution. With an unlevered balance sheet and high quarterly distributions, RDIV can be a great pick for income investors that want access to a diversified portfolio of equities. The fund’s deep value approach has been a very prudent investment strategy and can pay off going forward if the managers are able to continue to identify good opportunities.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.