Deep Dive: The timing may be perfect for this dividend-stock fund if the market is getting close to a top

The TrueShares Low Volatility Equity Income ETF
DIVZ
is actively managed, unlike most ETFs, which are designed to track stock indexes automatically. Austin Graff, the fund’s portfolio manager, explained how he selects stocks and pointed to sectors he believes investors should be focused on now.

First, let’s take a look how the 11 sectors of the S&P 500
SPX
and the broad indexes have performed this year, and compare their forward price-to-earnings ratios with those at the end of each of the past two years. (All returns in this article include reinvested dividends.)

The technology sector leads this year, but the communications sector runs a close second, and it includes tech stalwarts Meta Platforms Inc.
META,
-0.79%
and Alphabet Inc.
GOOGL,
-0.26%.

The forward price-to-earnings ratios for most of the sectors and the indexes are below their levels at the end of 2021, but the valuation for the tech sector is almost as high as it was then. For perspective, the S&P 500’s current weighted forward P/E is 19.6, compared with a 10-year average of 18.9. The tech sector’s P/E is 27.7, compared with a 10-year average of 21.9.

We cannot predict how long the current bull market may last. When the Federal Reserve sends a clear signal that it is ready to take an extended break from raising interest rates, the stock market could make another upward move as investors look ahead to declining interest rates, which make bonds less attractive and can help support stock prices.

Meanwhile, Joseph Adinolfi considers how long momentum can drive a stock rally.

Weathering a storm

In an interview, Graff, who has previous experience as an investment banker at Goldman Sachs and as a fund manager at Pimco Investment Management, explained that he maintains a list of between 100 and 125 stocks within the S&P 500 of companies whose dividend yields are higher than that of the index, or that he expects to increase their dividend payouts at a more rapid pace than the index does as a whole.

Then he narrows the list by analyzing the “profit drivers” for the companies as part of a qualitative analysis “to select companies that can perform through the business cycle.”

“There are times when consumer cyclicals benefit because consumers have more money,” but selecting companies for investment based on those trends can lead to “more volatility of earnings and cash flow,” Graff said. “That is what we are not interested in owning.”

From his pared list, Graff typically holds between 25 and 35 stocks in the DIVZ portfolio, seeking to buy at attractive entry points and hold for the long term.

DIVZ pays its own dividends quarterly. The current dividend yield is 3.29%, compared with a yield of 1.43% for the SPDR S&P 500 ETF Trust
SPY,
which tracks the benchmark index.

DIVZ was established on Jan. 27, 2021. Here’s how it has performed since then, compared with SPY:

These total returns are net of expenses, which are 0.65% of assets annually for DIVZ and 0.095% for the passively managed SPY. From its inception through Aug. 1, DIVZ has underperformed SPY, but it has been a smoother rise for investors. During 2022, SPY fell 18.2% while DIVZ had a positive return of 3.5%.

Buying on the (big) dip

When asked about recent purchases, Graff said he had scooped up shares of Charles Schwab Corp.
SCHW,
-1.44%
in May, following a decline of more than 30% for the stock after the brokerage firm, which relies heavily on its bank subsidiary, was “caught in some of the regional-banking crossfire.”

The three large U.S. bank failures this year — Silicon Valley Bank, Signature Bank of New York and First Republic Bank of San Francisco — had varying catalysts but ultimately resulted from runs on deposits. Shares of regional banks and Schwab fell not necessarily because investors feared more failures, but because of rising funding costs. Savers have been moving to get higher yields after so many years of being paid next to nothing by banks before the Federal Reserve began to raise interest rates last year.

“They have plenty of capital to get through the current environment,” Graff said about Schwab. The stock rose 11% on July 18, after Schwab Chief Financial Officer Peter Crawford said the deposit outflow had been slowing.

Another bank stock that Graff said he picked up at a good price was New York Community Bancorp
NYCB,
+0.07%,
which has soared following the bank’s discounted purchase from the Federal Deposit Insurance Corp. of deposits and some assets from the failed Signature Bank of New York.

Read: New York Community Bancorp’s profit up 148% with boost from Signature Bank acquisition, as stock rises

Here are the largest 15 holdings of the TrueShares Low Volatility Equity Income ETF:

Click on the tickers for more about each company, fund or index.

Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.

Graff commented further about his approach and the fund’s holdings.

• He is especially interested in the healthcare sector now, which is among this year’s worst performers. After a decline in elective surgeries during the pandemic, Medtronic PLC
  MDT,
  -0.53%
  is now well-positioned, he said, because of rising sales for pacemakers and other medical devices. Medtronic’s shares have a dividend yield of 3.15%. He added that UnitedHealth Group Inc.
  UNH,
  -0.42%,
  the fund’s second-largest holding, has said that an increasing number of elective surgeries are taking place.

• In the utilities sector — this year’s weakest performer among the S&P 500 sectors — he likes FirstEnergy Corp.
  FE,
  -1.31%
  of Akron, Ohio, because “it is cheap” and has a relatively high dividend yield, and because he expects new CEO Brian Tierney to improve the company’s management culture.

• Graff also likes Broadcom Inc.
  AVGO,
  -0.38%
  as a play on artificial intelligence. Nvidia Corp.
  NVDA,
  +0.37%
  is dominating financial press coverage because of its leading position as a maker of graphics processing units used by data centers to help corporate clients deploy AI. But Graff believes Broadcom will also make out well during the AI build-out. “As they bring in chips to run more intense workloads, Broadcom is providing the network support for that setup — the switches and the routers for the data center,” he said.

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