Why This Dividend ETF Matters

The Federal Reserve's softer stance on interest rates for 2019, which could prove to include no rate hikes at all this year, is lifting high-yielding assets.

The SPDR Portfolio S&P 500 High Dividend ETF SPYD, an oft-overlooked dividend exchange traded fund, is participating the interest rate ebullience theme. SPYD is up 13.21 percent year to date.

What Happened

High dividend strategies, such as SPYD, faced some challenges last year when the Fed raised interest rates four times. Explaining that phenomenon is simple: high dividend funds usually feature large allocations to sectors that are historically sensitive to changes in interest rates.

SPYD follows the S&P 500 High Dividend Index and holds 80 stocks. Real estate, a high-yielding, defensive sector, is by far SPYD's largest sector weight at 21.2 percent. The fund also features a 12.54 percent weight to utilities stocks.

Why It's Important

While higher interest rates can pressure dividend stocks over the short term, there is no denying the long-term potency of dividend investing.

“Over the past 30 years, dividends from S&P 500 stocks have, on average, contributed exactly half of the index’s total return on an annual basis,” said State Street in a recent note. “While price returns of equities can fluctuate year over year, dividends tend to be more stable, consistently offering a positive contribution to total return each year.”

With SPYD yielding 4.3 percent, or more than double the dividend yield on the S&P 500, investors that do need the income lobbed off by the fund today should consider reinvesting those dividends.

“One of the strongest takeaways from the above is the compounding effect,” said State Street. “As the time horizon is stretched out, that contribution to return becomes even more pronounced as dividends reinvested back into the stocks are able to continuously compound.”

What's Next

Given SPYD's status as a high-yield dividend ETF and that about 42 percent of the fund's weight is allocated to defensive sectors, a more sanguine interest rate outlook is pivotal to the ETF's fortunes this year. Data suggest investors are comfortable embracing that theme.

Year-to-date, investors have added $404.41 million to SPYD, a significant percentage of the ETF's $1.48 billion in assets under management.

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