Summer Safety Plays With Dividend ETFs

With factors such as growth and momentum shining this year, it is not surprising that some dividend-oriented strategies and exchange traded funds are lagging. While the S&P 500 is up more than 8 percent year to date, the SPDR S&P Dividend ETF SDY and the ProShares S&P 500 Dividend Aristocrats ETF NOBL are up 4 percent and 7 percent, respectively, including dividends paid.

Still, defensive strategies can be rewarding in the often hard-to-navigate summer months when investor's risk appetite dwindles. Some defensive sectors perked up in significant fashion in the latter stages of May.

Going On The Defense

“Investors' recent tendency toward the defensive, high yielding sectors likely reflects the increased level of political uncertainty in the marketplace and a flight to safety,” said CFRA Research's Director of ETF & Mutual Fund Research Todd Rosenbluth in a note out Thursday. “Utilities, real estate and staples achieved most of their May gains in final two weeks of the month, when concern regarding the Trump administration was heightened. Over the course of the same period, the 10-year Treasury yield declined from 2.34 percent on May 15, to 2.21 percent on May 31.”

SDY For The Summer

SDY only holds stocks that a have a minimum dividend increase streak of 20 years. The ETF tracks the S&P High Yield Dividend Aristocrats Index. NOBL tracks the S&P Dividend Aristocrats Index, which mandates each holding has a dividend increase of at least 25 years.

SDY allocates 26.3 percent of its combined weight to consumer staples and utilities stocks while real estate names account for 6.4 percent of the ETF's roster. NOBL's largest sector allocation is 25.5 percent to consumer staples, but utilities are just 2 percent of that fund's weight.

SDY's “index is comprised of S&P 1500 companies (including S&P 400 mid-cap and S&P 600 small-cap stocks) that have consistently increased their dividend for at least 20 years. The High Yield index has also outperformed the S&P 500 (and S&P 1500) over the last ten years, appreciating 13 percent more than the broader index. The performance of the S&P High Yield Dividend Aristocrats index is less consistent than the S&P 500 Dividend Aristocrats index given the inclusion of mid- and small-cap companies, which can be more volatile,” said CFRA's Lindsey Bell in the note.

While SDY and NOBL feature some exposure to some high dividend sectors, neither is a pure high-dividend strategy as highlighted by an average yield of about 2.25 percent on the two ETFs. Lower-yield dividend growers can usually endure higher interest rates better than high-yield rivals.