A Hidden Gem Among Dividend ETFs

Thanks in large part to declining Treasury yields and ample speculation that the Federal Reserve will not be able to raise interest rates as many times as previously planned, some luster has been restored to dividend exchange-traded funds.

That theme extends to high dividend funds and newer dividend ETFs, including the SPDR S&P 500 High Dividend ETF SPYD. The SPDR S&P 500 High Dividend ETF, which debuted in October, is higher by an impressive 8.6 percent this year.

SPYD tracks the S&P 500 High Dividend Index, a benchmark "designed to measure the performance of the top 80 dividend-paying securities in the S&P 500 Index, based on dividend yield," according to State Street Global Advisors, the third-largest U.S. ETF issuer.

To be precise, the rookie ETF currently holds 81 stocks with a weighted average market value of $34.1 billion.

Holdings And Allocations

“During the low interest rate environment of the past few years, many investors seeking income looked beyond low-yielding bonds to focus on asset classes with juicier yields, including high dividend paying stocks. While these stocks performed well in a rising equity market, they may be riskier now. Earnings growth is slowing as leverage is increasing, resulting in numerous firms cutting dividends,” said State Street Vice President David Mazza in a recent note.

Related Link: Boring Bonds Boost ETF Asset Growth

SPYD's overall exposure to energy stocks is about 12 percent, indicating the ETF's risk to negative divided action by way of that particular sector is fairly low. Although SPYD is a dividend ETF and one with plenty of stocks from what appear to be boring sectors, the rate sensitivity of utilities, telecom and other stocks mean SPYD should not be perceived as a low volatility, at least not at the start of a tightening cycle.

The good news is it is hard to call what the Fed is engaged in right now a legitimate tightening cycle. And it is the dithering the Fed that is helping power ETFs like SPYD higher. In the case of SPYD, this is an ETF that devotes roughly a third of its combined weight to various utilities stocks and telecom names. Additionally, SPYD allocates more than 10 percent of its weight to real estate investment trusts (REITs).

Familiar names in the ETF include Murphy Oil Corporation MUR, Centurylink Inc CTL and Exelon Corporation EXC.

Add the aforementioned factors up and it is not surprising that SPYD sports a dividend yield of nearly 4.2 percent, or more than double the yield on 10-year U.S. Treasurys.