Hunting for Value? Let Dividend ETFs Lead the Way

Why are dividends a good value screen?

When it comes to identifying value, there’s no shortage of metrics—price-to-earnings, price-to-book, and price-to-free-cash-flow ratios all come to mind. But sometimes, it’s simpler than that. A depressed share price can often signal value, but how do you determine whether it’s a bargain or a sign of trouble? For dividend stocks, this question becomes much easier to answer.

Consider a dividend-paying stock that has a consistent track record of growing its payouts. Imagine it trades at $100 per share and pays an annual dividend of $5, resulting in a 5 percent yield. Now, if the share price drops to $90 and the dividend remains unchanged, the yield increases to 5.56 percent.

Why does this matter? If the company continues to perform well—generating cash and maintaining its dividend—this higher yield could indicate better value than before. A higher yield, in this case, suggests that the stock might be undervalued relative to its historical metrics.

This is why dividend yield can serve as a solid “first look” for value, particularly when applied to reliable blue-chip companies. For large-cap stocks in the U.S. market, dividend-paying companies often combine strong fundamentals with predictable cash flows, making their yields a useful tool for spotting potential bargains.

Why use a dividend ETF?

If you understand the value of using dividend yields as a screen for quality and value, then a dividend ETF becomes an easier, automated, and methodical way to implement this strategy.

Take DLN for example. It focuses on U.S.-listed stocks that not only pay dividends but also meet certain liquidity and market cap requirements. The holdings in DLN are weighted annually based on the total cash dividends each company is projected to pay, ensuring a focus on companies with strong income-generation capabilities.

DHS takes this approach a step further. While it also selects companies based on the proportionate share of projected aggregate cash dividends, it incorporates an additional layer of analysis. DHS uses a composite risk score, examining trends in return on equity (ROE), return on assets (ROA), gross profits over assets, and cash flows over assets within industry groups.

The result is a portfolio of around 300 large-cap stocks. DLN

offers a solid 2.98 percent 30-day SEC yield, while DHS

DHS

-0.37%

goes even higher at 3.65 percent. Both ETFs pay distributions monthly, which is excellent news for income investors.

But as we’ll explore shortly, these ETFs offer not just reliable income but also significant opportunities for value-focused investors.

DLN and DHS: value ETFs in disguise

I conducted a factor regression analysis for DLN and DHS against the iShares Russell 1000 Value ETF (IWD) from July 2006 to October 2024. Factor regression is a method that assesses how much an ETF’s returns are influenced by specific investment factors.

In this case, I looked at five commonly used factors:

• Rm-Rf: The market risk premium, measuring overall market exposure
• SMB: The size factor, indicating exposure to smaller stocks
• HML: The value factor, reflecting a preference for undervalued stocks
• RMW: Profitability, based on companies with strong returns on equity or assets
• CMA: Investment, related to companies’ asset growth rates

Notably, DLN

loaded statistically significantly on the value factor (0.27), close to IWD’s 0.30. DLN also showed strong exposure to profitability (RMW) and investment (CMA), both signs of quality.

Taken together, this means the stocks in DLN are, on average, undervalued yet profitable and disciplined in their growth—hallmarks of high-quality value stocks.

DHS

demonstrated even stronger value exposure, with a loading of 0.47 compared to IWD’s 0.30. Simply put, DHS’s focus on dividends led it to hold stocks that were, on average, more undervalued than those in an ETF tracking a “brand name” value index like IWD.

On the performance side, DLN has delivered. From June 16, 2006, to November 21, 2024, it returned 9.42 percent annualized versus 8.08 percent for IWD. DLN also had a better risk-adjusted return, with a Sharpe ratio of 0.5 compared to IWD’s 0.42.

These findings suggest that both DLN

and DHS

DHS

-0.37%

offer more than just dividend income; they are excellent tools for accessing the value factor in a transparent, disciplined way.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.