An ETF With A Long-Term Dividend Strategy

Among older dividend exchange-traded funds, the usual strategies are to focus on high-yield dividend payers or those companies displaying favorable payout growth trends. High dividend stocks often hail from sectors, such as consumer staples, telecommunications and utilities, implying that these name are favored when Treasury yields are falling.

On the other hand, dividend growers are favored for their quality traits and, of course, those steadily rising payouts. The SPDR S&P Dividend ETF SDY is one of the oldest and largest U.S. dividend ETFs and some of that success is attributable to a methodology that focuses on steady dividend growers.

SDY turns 13 later this year and has nearly $15.4 billion in assets under management. The ETF tracks the S&P High Yield Dividend Aristocrats Index, which mandates that member firms have dividend increase streaks of at least 20 years.

Advantages Of Dividend Growers

“Dividend growers, which tend to be higher quality companies, have generally shown greater resilience in unsteady markets and could address concerns about dividend stocks in a rising-rate environment, to some extent,” said S&P Dow Jones Indices.

SDY allocates just 12.8 percent of its weight to the utilities sector. By comparison, the iShares Select Dividend ETF DVY, a yield-driven strategy, devotes more than 26 percent of its weight to utilities. Over the past three years, SDY has outperformed DVY by 300 basis points, including dividends paid.

For the six years spanning 2012 through 2017, SDY outperformed DVY in four of those six years. SDY yields 2.32 percent, 40 basis points above the dividend yield on the S&P 500.

Not Just 20 Years

As was noted earlier, SDY's underlying index requires 20 consecutive years of dividend increases, but many of its components go well beyond that requirement.

“While the hurdle for index inclusion is 20 straight years of increasing dividends, the index average is 35.9 years,” said S&P Dow Jones. “Additionally, there are eight constituents with over 55 consecutive years of dividend increases. This impressive consistency suggests a certain amount of financial strength and discipline, which may provide some downside protection in turbulent markets.”

Historical data indicate SDY's index tops the broader market when stocks swoon. From the end of 1999 through the end of 2017, the 15 worst months for the S&P Composite 1500 resulted in average declines of 8.93 percent, but SDY's index fell an average of 5.85 percent in those months, according to S&P Dow Jones data.

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