The World’s Most Ingenious Dividend Strategy

It’s been near-impossible for the average investor to isolate dividend growth without putting capital at risk amid the market’s whims.

For a regular investor, you’d have to buy a stock … and hold it through ups and downs … just to collect the dividends. And you’d hope or pray a rally would follow each pullback.

You know that every stock price can go down as well as up. Even if a company consistently grows earnings, pays higher dividends and possesses solid fundamentals, that still doesn’t guarantee you’ll get good returns.

Maybe some market event pushes the stock price down. For example: an employment report, a data breach, an oil shock or a Trump tweet.

Point is, you’re exposed to the resulting price fluctuations while you hold the stock, trying to capture its dividend payments. Just one piece of negative news could wipe out your dividend payment(s) in an instant.

Now, some hedge funds and Wall Street trading desks partner up with big banks to use a covert dividend-growth strategy to avoid the market noise. But this backroom strategy has primarily been reserved for large institutions with the right connections and billions of assets.

But, what if I told you there was a way to invest like the biggest institutions and the world’s most-elite investors when it comes to the purest form of dividend growth …

For example, which line would you rather own in the three charts below?

Source: Compustat

Of course, you’d pick the (upper) green line in each case.

These three charts show two different ways (total return and dividend growth) to play International Business Machines (IBM), Johnson & Johnson (JNJ) and Coca-Cola (KO) from 2000 to 2016. (A period that encompassed two bear markets.)

The “blue lines” in these charts — the ones that go up and down and don’t rise nearly as much — are the total returns of each stock (price appreciation + dividends). As you can see, these three blue chips weren’t “smooth rides” over this period.

But the “green lines” — the ones that always go up and far outpace the blue lines (total returns) — represent the dividends each stock paid.

Here’s how each approach played out in terms of cumulative returns over the last 17 years …

  • IBM’s green line rose 1,067% without ever declining. Its blue line returned 102% — 10X less — and whipsawed sideways most of the way.
  • JNJ’s green line increased by 471% and never went down. Its blue line rose 279% — nearly 200% less — and chopped up and down quite a bit.
  • KO’s green line walked right up the staircase to the tune of 338% and didn’t miss a step. Its blue line went up 120% — about one-third less — and snaked back and forth throughout.

But as I said before, the average investor hasn’t been able to invest in the “green line.” That privilege has only been accessible to bigwig investors.

That all changed on Dec. 18, 2014.

That was day the innovative dividend experts at San Diego-based Reality Shares launched the Reality Shares DIVS ETF (DIVY).

This ETF lets anyone (institutions, financial advisers, regular investors, etc.) invest in the “dividend-only” line of the S&P 500 Index. Without having to worry about stock prices that yo-yo around these steady — and increasing — payouts.

DIVY used to employ a complicated option strategy to extract dividend growth called a “Jelly Roll.” The “roll” was a four-legged option combination built around the dividends. And the “jelly” was the dividends captured in the middle of the option expirations.

The portfolio management team abandoned the options strategy in September 2015 in favor of more-efficient and -effective dividend swaps, which it still uses today.

A dividend swap is a derivative in which counterparties — i.e., Reality Shares and a big bank(s) — exchange a set of future cash flows at set dates in the future.

For example, Reality Shares purchases 2018 S&P 500 dividend-swap contracts at a price of $48 (meaning the aggregate dividend per share of the S&P 500 as an index is $48), believing this contract to be undervalued under the expectation that S&P 500 dividends will end 2018 at a higher value.

If so, Reality Shares would be owed the ending dividend value. And it would benefit from capital appreciation due to dividend growth beyond market expectations. As dividends continue to grow, DIVY’s share price should grow proportionately.

This change has improved DIVY’s efficiency in several ways …

  Lower transaction costs: One contract instead of four option trades.

  Outside investors can’t affect the pricing of the contract. Whereas, they could have affected any of the four options legs with the jelly roll.

  Reduced NAV (net asset value) volatility.

Take a look at how much smoother and more consistently DIVY performed since the changeover in September 2015 …

Source: Reality Shares

Now, you’re probably thinking: OK, the dividend growth of IBM, JNJ and KO beat those stocks’ total returns. But, that doesn’t happen with every stock.

And that’s correct.

You see, DIVY is more of an alternative approach. You won’t get the upside of blowout years in the stock market, but you shouldn’t get the downside of portfolio crippling years, either.

It’s all about dividend growth, and only dividend growth, with DIVY.

The burning question is: How does dividend growth perform year after year?

S&P 500 dividends have risen 41 of the last 44 years …

Source: Bloomberg, Compustat, S&P Capital IQ

Whereas, the S&P 500 has generated a positive return in 35 of the last 44 years.

Now, S&P 500 annual dividend growth (6.4%) didn’t beat the S&P 500 annual price return (6.9%) over the last 44 years. But, that 6.4% didn’t have anywhere near the volatility of the stock market.

Remember, DIVY is more of an alternative strategy. It has a low correlation to other traditional asset classes and a standard deviation that’s much closer to bonds than stocks …

Source: Bloomberg, Compustat, S&P Capital IQ, Reality Shares Research (data from 12/18/14-3/31/17)

In fact, DIVY is the only ETF — or fund — that runs this distinct strategy. Meaning, it’s unlike any of the other 500-plus dividend-oriented ETFs and mutual funds in the marketplace.

I asked a friend, who is the CIO for a $1.5 billion wealth management firm, why he uses DIVY in his model portfolios. He told me:

DIVY is the only pure play on dividend growth available to retail investors. And consequently, a necessary component of any diversified portfolio. It adds an entirely different source of returns with low correlation to traditional and alternative investments. Our clients like DIVY’s strikingly low volatility and potential for equity-like returns to the upside.

DIVY and the Reality Shares group haven’t gone unnoticed when it comes to industry awards and accomplishments …

  Finalist in’s “Most Innovative New ETF” category (2014)

  Finalist in’s “Most Innovative ETF Issuer of the Year” category (2014)

  Winner of’s “New ETF Issuer of the Year” award for the launch of DIVY (2014)

  Rang the opening bell at the NYSE on March 30, 2015, to celebrate the launch of DIVY

  Winner of “Most Innovative ETF — Americas” at 12th annual Global ETF Awards (2016)

  Winner of “Alternative ETF of the Year” at Fund Action ETF Innovation Awards (2017)

  Current member of U.S. News’ “Best ETFs” list

But, this ETF is still somewhat of an undiscovered gem …

Its unique approach of isolating dividends can’t be copied by another ETF issuer because of its proprietary index licenses and methodology copyrights.

Plus, most investors don’t know about DIVY, as evidenced by its $53 million in assets. (Not that big in the fund world.)

But, now YOU know.

To learn more about the Reality Shares DIVS ETF (DIVY), click here.

Grant Wasylik

Originally from Pennsylvania, Grant graduated from Juniata College with an economics major and accounting minor. Since graduation, Grant has worked in the investment industry for almost two decades by serving in various roles … Prior to coming to…