By Ian Salisbury

Beating the market isn't easy. That's especially true for dividend funds. But the Capital Group Dividend Value exchange-traded fund has managed to do it handily during its relatively short lifetime.

Stocks that pay steady dividends tend to be less volatile than the overall market. And at least some academic research suggests they can outperform in the long run. But lately, these market stalwarts have been left in the dust by growth stocks.

Over the past three years, the $109 billion Vanguard Dividend Appreciation ETF, an index fund that represents the largest dividend mutual fund on the market, has returned 12.3% a year on average, compared with nearly 17% for the S&P 500. In that same span, Capital Group Dividend Value has returned 22% a year, helping it garner $20 billion in assets since its launch in February 2022.

The fund's success is even more impressive considering it's an ETF. While active ETFs have slowly been gaining popularity, many of the most prominent ones target bonds or niche income strategies such as selling covered call options. It's an area where plenty of traditional stock-picking shops, like Fidelity and T. Rowe Price, have struggled to gain traction.

Capital Group Dividend Value owes its success, at least in part, to a liberal interpretation of "dividend value." The fund's portfolio resembles what many might expect to find in a growth fund, with Microsoft, Nvidia, and Broadcom as the top three holdings.

The fund's name "is not super-accurate," says Morningstar analyst Stephen Welch. Morningstar gives the fund a top gold medal rating, but places it in the "large blend" quadrant of its style box.

It's worth noting that Nvidia, Microsoft, and Broadcom all do pay dividends -- although Nvidia's dividend yield is a squint-to-see-it 0.02%.

Christopher Buchbinder, the fund's principal investment officer, says the five-person portfolio management team has a mandate to target investment-grade dividend-paying stocks with an average yield, across the portfolio, that's 30% above the yield of the S&P 500. In recent months, the average yield of the S&P 500 has shrunk to less than 1.25%, its lowest level since the peak of the dot-com bubble, making that a fairly modest target. Capital Group Dividend Value yields 1.6%.

Buchbinder says the fund targets dividends not just for income but as part of an "investment discipline" designed to reduce the portfolio's volatility. The fund's recent success is due partly to avoiding steep losses this spring when tariff worries set off a market swoon, he adds. Investors shouldn't expect it to outperform in all market conditions. "If you get into a really strong growth market where non-dividend-paying growth companies are leading, we're not going to keep up with that," he says.

In terms of what he looks for in an investment, he singles out two examples: Royal Caribbean Group, which Capital Group bought in 2022 in the wake of the Covid pandemic, and Boeing, which it added last year. In both cases, the fund targeted a strong brand in a difficult-to-enter industry with problems that it viewed as temporary. The fund typically aims to hold stocks for three to five years, Buchbinder says.

What about Nvidia and other highflying tech names? The fund has owned Broadcom since its February 2022 inception. At the time, it was trading at around 17 times forward earnings, compared with nearly 39 times today. Nvidia is a more recent acquisition. Buchbinder says the fund swooped in this spring, when a temporary selloff offered an entry point: "That's one where there is a big opportunity in AI going forward, and they are the leader."

If Capital Group can keep outperforming, the fund is likely to gain a lot more fans. Its fee of 0.33% is slightly lower than the 0.42% average for active stock ETFs, and significantly lower than the 0.57% average for active equity mutual funds.

Fundholders also benefit from other aspects of the ETF structure: Despite big annual returns and 25% annual portfolio turnover, the fund has so far avoided passing out any capital gains to fundholders, a move that can prompt capital-gains taxes.

Buchbinder says the ETF structure, which allows funds to swap appreciated stocks out of the portfolio, rather than sell them and register a gain, is a key reason the fund has accomplished this.

Write to Ian Salisbury at ian.salisbury@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

August 12, 2025 02:00 ET (06:00 GMT)

Copyright (c) 2025 Dow Jones & Company, Inc.