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(Bloomberg) — Among the many reasons to love Nvidia Corp., barely anyone on Wall Street bothers to mention its dividend yield at a paltry 0.03%.
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And yet this famous poster child of growth-stock investing ranks among the top holdings of Fidelity’s high-dividend ETF — which is somehow beating the S&P 500 even in this year of epic risk taking fueled largely by the boom in fast-expanding companies.
Thank quirky investment parameters that, by design, allow in growth companies — as well as a hefty dose of good fortune — for powering the $3.4 billion income-seeking strategy. As a result, the product boasts a sizable weighting toward the AI darling, alongside holdings of Apple Inc. and Microsoft Corp. The fund has seen inflows of just over $1 billion this year, the most on record since its 2016 inception, and has risen more than 18% on a total-return basis, nudging out the S&P 500’s gains by nearly a percentage point.
“One reason it looks so much better than your traditional dividend fund over the past few years is because it has those core megacap tech stocks at the very top of the portfolio,” said Ryan Jackson, senior manager research analyst for Morningstar Research Services, who penned a note on the topic titled Unorthodox but effective. “It’s like finding out the exotic meal at a Michelin-star restaurant is made with the same core ingredients you cook with at home.”
The asset manager’s unconventional strategy for FDVV “offers attractive yield potential with modest sector tilts while controlling for potential unintended risks such as small-size bias and single-stock concentration,” according to a Fidelity spokesperson.
Rather than turning mostly to dividend aristocrats, often big payers in the health-care, consumer staples and industrial sectors, FDVV starts by looking for dividend-paying companies — including international firms — and then sieves out, among other things, those with super high payout ratios. High yields, according to Morningstar’s Jackson, can sometimes signal a troubled company.
The fund then weights all of its chosen stocks by market capitalization — with an extra twist. It adds an “equal-weight adjustment” that’s designed to balance the portfolio and keep it from getting too top heavy.
From there, it reallocates portfolio weights from lower-yielding sectors to higher-yielding ones. It does this in order to ensure that its yield doesn’t suffer too much by having too much exposure to tech, for instance — which comprises roughly a quarter of the current portfolio — and tends to be lower-yielding than, say, utilities.
Via this methodology, tech giants have managed to become some of the fund’s top holdings. That’s been a boon this year as most of the Magnificent Seven — Nvidia, Microsoft, Apple as well as Meta Platforms Inc., Alphabet Inc. and Amazon.com Inc. — have powered the market higher, with advances contributing the majority of gains for the S&P 500 and the Nasdaq 100 indexes.
For Nvidia, the story has famously been about continued potential growth around artificial intelligence. The stock has added more than 135% this year — even after accounting for a recent downdraft — a surge that relegates its 1 cent per share quarterly dividend to a largely forgettable part of its investment proposition.
Other growth-oriented tech stocks have also been embracing tiny dividends — raising the question of if such payouts are being made in order to have shares eligible for inclusion in ETFs like FDVV.
“As we see more and more money pile into the ETF universe, is it possible that stocks are catering to some of their needs? Yes, I think that makes sense,” Morningstar’s Jackson said.
“It’s a little bit funny to think about the third-largest company in the world, Nvidia — this absolute behemoth — concerned about what the Fidelity High Dividend ETF thinks about it,” he added. There are a lot of other ETFs that require a long runway of dividend growth or payments, “and you have to get started early.”
–With assistance from Athanasios Psarofagis.
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