Outperforming the market with a good mix of stocks

The Capital Group Dividend Value ETF (CGDV) has outperformed the broader market since launch, with a holding that includes both large-cap growth stocks and solid value and dividend stocks.

I’m bullish on this popular, relatively new $9.4 billion ETF from blue-chip asset manager Capital Group. My position is based on its strong track record since launch and an actively managed portfolio that includes a sensible mix of powerful growth and technology stocks with more stable value and dividend stocks.

This mix, and the fact that CGDV has outperformed the broader market with less exposure to large-cap technology companies, looks especially attractive as the broader market shifts away from large-cap growth stocks and into more defensive sectors.

What is the CGDV ETF strategy?

Capital Group explains that CGDV “seeks to generate consistent income that will exceed the average yield of the S&P 500 Index by focusing on companies that pay dividends or have the potential to pay them.”

Like other Capital Group ETFs, this is an actively managed ETF in which a team of experienced portfolio managers invest in their most compelling ideas. In the case of CGDV, the fund’s five portfolio managers have a combined extraordinary 164 years of investment industry experience.

An encouraging start

CGDV’s active approach has worked well for the fund’s investors so far. Since launching in February 2022, CGDV has generated an impressive 50% total return. This compares favorably with the broader market. The SPDR S&P 500 ETF Trust (SPY) has generated a 29% total return over the same period.

While it must be said that this is not a very long story, it is a very promising start. What’s more, this short period still encompasses drastically different market landscapes, from a bear market in 2022 to a raging bull market in 2023, showing that CGDV has the predisposition to adapt and thrive in different market environments.

A balanced approach

CGDV holds 53 stocks, with the top 10 holdings of CGDV accounting for 39.9% of the fund. Below you can find an overview of the top 10 holdings of CGDV using TipRanks’ holdings tool.

As you can see, CGCV owns a mix of big tech powerhouses like Apple (AAPL), Microsoft (MSFT), and Meta Platforms (META). It also owns dividend and value stocks from more defensive sectors like healthcare, financials, and consumer discretionary, including Philip Morris (PM), British American Tobacco (BTI), and American International Group (AGI). Industrials are also well-represented with names like Raytheon (RTX), GE Aerospace (GE), and Carrier Global (CARR).

The story continues

While they haven’t received the same recognition as the top tech stocks, stocks like Raytheon and GE Aerospace have quietly generated phenomenal gains of 37.4% and 85.4%, respectively, over the past year. The strong performance of these top stocks demonstrates both the stock selection acumen of CGDV’s portfolio managers and the importance of not overlooking more value-oriented names.

This mix of growth stocks and more defensive stocks seems like the right approach. That’s especially true at a time when the broader market seems to be pivoting away from large-cap tech stocks, which have recently posted huge gains, to stocks in lower-valuation sectors that are just starting to heat up.

For example, over the past month, the tech-focused Nasdaq (NDX) fell 3.6%, while sectors like financials and healthcare, represented by the Financial Select Sector SPDR ETF (XLF) and Health Care Select Sector SPDR ETF (XLV), rose 5.8% and 2.6%, respectively, during the same period.

CGDV has a 17.8% weighting in Technology, which is significantly less than the massive 31.3% sector share in the broad SPY ETF. Instead, CGCV allocates a bit more of its portfolio to the aforementioned sectors, such as industrials, healthcare, and consumer staples.

I like the fact that CGDV has lower exposure to these higher multiple tech stocks, but it doesn’t completely avoid them. We know that at some point the market will return to large-cap growth, so avoiding them completely wouldn’t be an ideal strategy.

CGDV’s well-balanced portfolio is also highly rated by TipRanks Smart Score. The Smart Score is a proprietary quantitative stock scoring system created by TipRanks. It assigns stocks a score from 1 to 10 based on eight key market factors. A score of 8 or higher is equivalent to an Outperform rating.

Seven of CGDV’s top 10 assets received an Outperform Smart Score of 8 or higher, including the aforementioned Meta Platforms, UnitedHealth Group, and Philip Morris, which received a “Perfect 10” Smart Score. CGDV itself has an Outperform ETF-equivalent Smart Score of 8 out of 10.

A modest dividend

As its name suggests, CGDV is a dividend payer, although its 1.5% yield is barely enough to attract the attention of pure dividend investors. However, the dividend contributes to the fund’s total returns, which have been attractive to date, as discussed above. There is also the possibility that CGDV could increase its dividend payouts over time.

What is the CGDV expense ratio?

CGDV charges an expense ratio of 0.33%, meaning an investor will pay $33 in fees for a $10,000 annual investment. While that’s a bit more than we’re used to from some index funds, it’s not an unreasonable fee for an actively managed fund, especially one that’s performing as well as CGDV.

Do analysts think CGDV shares are worth buying?

Turning to Wall Street, CGDV gets a Moderate Buy consensus rating based on 45 Buys, nine Holds, and zero Sell ratings assigned in the last three months. CGDV stock’s average price target of $37.98 implies 9.6% upside potential from current levels.

A smart choice for the current market

I am bullish on CGDV based on the excellent returns the fund has generated since its inception in February 2022. During this time, it has significantly outperformed the broader market and performed well in a variety of market conditions.

I also like the fact that it has performed well while showing less exposure to technology than the broader market, which is especially attractive in the current market rotation. A well-balanced mix of technology, growth, and a sensible blue-chip value/dividend stock, CGDV seems like a smart bet going forward.

Disclosure