What is a Bird in the Hand?

QDIV is a monthly dividend ETF

Pretend that investments are like birds. There are at least four or five different birds. There is an almost dead bird. Perhaps it is a hemorrhaging bird. You probably want to avoid those birds. The next is the egg-laying bird. This is an investment that pays dividends. You can eat the eggs without frying the chicken. Then there is the bird on growth hormones. This bird can grow quickly, but there may be side effects that surprise you later. Tesla (TSLA) is that kind of bird, as is Netflix. In reality, most stocks are like birds in a bush. If you don’t sell them at the right time and price, you may watch your “gains” fly away in a bear market.

Finally, there is the bird in the hand investment. Obviously, any investment can be this kind of bird if you know how to buy and sell options. This is like letting someone visit your aviary for an admission price. Not only that, but they might even buy the bird from you at a price you set.

But another bird-in-the-hand is the stock or the ETF that pays you monthly. You can take those dividends to the bank, buy other investments, or give the eggs away to those who need some help. Some of my bird-in-the-hand investments include QYLD, MAIN, GAIN, and STAG. QDIV is one I added this week.

There are a couple of reasons I like QDIV. Don’t get me wrong, I am not going to sell our shares of VYM, SCHD or DGRO. But there are some advantages to adding QDIV to the ETF mix. There are also some risks, but I don’t consider them significant. Let me share the advantages, the disadvantages, and some information about the index used as the benchmark for this ETF.

QDIV is not at the head of the class, but it is worthy of consideration.
QDIV is number 22 in the QUANT ratings for 86 Large Cap ETFs. SOURCE: Seeking Alpha

The Advantages

First of all, the ETF is focused, and the holdings are equally weighted. Many funds are very diverse, but QDIV has a focused 88 holdings. The “equal weighting” is a temporary illusion. The reason is that the fund can quickly be over-weighted in stocks that perform well, while the dregs drop to the bottom. During each year, a rebalancing should bring everything back to equal weight, where every position is an equal percentage of the total investment dollars. If the entire fund was currently equal weighted, then each position would be 1.14% of the total investment dollars, and the top ten would only be 11.40% of the total.

The fund also will eliminate investments that fall out of favor, replacing them with stocks that align to the S&P 500® Quality High Dividend Index. This is the desired approach when you expect both quality and high dividend yield.

Another advantage is that QDIV pays the dividend monthly. While most ETFs pay quarterly, there are some that have a monthly dividend. This is advantageous in two ways. One is that you have a steady monthly income. In retirement, this can be a blessing for many investors who live off of their dividend income. The other advantage is “a bird in the hand is (maybe) better than two in the bush.” The reality of investing is that stock prices go up and down. However, when you receive a dividend, you are receiving something that is now settled. The company cannot take back the dividend.

Another advantage is the expense ratio. While higher than some, it certainly isn’t unreasonable at 0.20%.

The Disadvantages

In the case of QDIV, the Assets Under Management (AUM) is very small at about $61 million. While I tend to avoid the smaller AUM ETFs, this ETF seems to have a bent to quality, so I am less concerned that management will shut the ETF down. They don’t have to work much to get over $100,000 in expense dollars from their $61 million investment pool. They just have to make changes a couple of times per year, and I suspect that is done in just a meeting or two when they discuss the holdings they will sell and the ones they will add.

The other “disadvantage” is that this fund isn’t likely to have huge growth in the dollar/share value of the fund. It is thinly traded, so demand for the shares will be muted. Therefore, don’t buy this ETF if you don’t want to hold it for a longer period.

The Benchmark: S&P 500® Quality High Dividend Index

QDIV has a focus on quality plus dividends

When you buy a fund, you should try to understand the index that the fund managers are using to make decisions about the fund’s positions. In the case of QDIV, they are focused on a special, dividend-specific S&P 500 index. Here are some images from that fund’s information to help you understand the QDIV’s approach based on this index.

The Portfolio Analyzed by a Seeking Alpha Contributor

One recent post helps explain why you might want to consider adding QDIV using buy limit orders. My buy limit order for QDIV was for 100 shares at $31.50.

“QDIV begins its stock-picking process by ranking the S&P 500 stocks by both quality and dividend yield. The “quality” score is determined by financial metrics such as return-on-equity, the accruals ratio, and financial leverage. Those considered for inclusion in the fund are those in the top 200 (or top 40%) in both categories. There is no limit on the number of stocks held, but the ETF currently holds 70 components.” – Seeking Alpha

“Since the fund’s holdings are equally weighted, the top ten by weighting are effectively a glimpse at the most outperforming stocks in recent months. With 70 stocks, equal weighting would produce an exact weighting for each stock of 1.43%.” – Seeking Alpha

Fund Profile

Global X Funds – Global X S&P 500 Quality Dividend ETF is an exchange traded fund launched and managed by Global X Management Company LLC. It invests in the public equity markets of the United States. The fund invests in stocks of companies operating across diversified sectors. It invests in growth and value dividend paying stocks of large-cap companies. It seeks to track the performance of the S&P 500 Quality High Dividend Index, by using full replication technique.

The investment seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the S&P 500® Quality High Dividend Index (“underlying index”). The fund invests at least 80% of its total assets in the securities of the underlying index.

Wise Investors Pay Attention

Monthly dividends add up in the course of a year. Twelve separate birds in your hand.

There are some investments that can give you more than just a meal. Your flock can grow if you invest in lambs. Lambs will give you wool and you can use some of them for meat as the herd grows. Think this way about your investments and you will be thinking like King Solomon.

“Know well the condition of your flocks, and give attention to your herds, for riches do not last forever; and does a crown endure to all generations? When the grass is gone and the new growth appears and the vegetation of the mountains is gathered, the lambs will provide your clothing, and the goats the price of a field.” Proverbs 27:23-26 ESV