A Dependable Dividend ETF

Higher beta sectors have been in favor for much of this year, but investors should not turn their backs on dividend strategies. While fears of rising interest rates coupled with leadership from the technology sector have weighed on some dividend exchange traded funds, returns from this group are still solid, though some still lag the S&P 500.

The SPDR S&P Dividend ETF SDY is up a decent 14.4 percent year-to-date, including dividends paid. At a time when interest rates throughout the developed world are still low, an ETF such as SDY offers some allure for conservative, income-seeking investors. The $16.5-billion SDY, which recently turned 12 years old, is one of the oldest and largest U.S. dividend ETFs.

SDY has long been a favorite with dividend investors due to the fund's focus on dividend growth. The ETF's holdings must have payout increase streaks of at least 20 years, a strategy that potentially limits volatility while ensuring dividend consistency.

Financial Health

Dividends are one of the best ways to gauge a company's financial health. Said another way, it's rare when financially healthy firms cut or suspend dividends.

SPDR S&P Dividend ETF tracks the S&P High Yield Dividend Aristocrats Index, which includes stocks from the S&P 1500 Composite Index that have increased their dividend payment for at least 20 consecutive years,” Morningstar said in a note last week. “The fund's focus on firms that are financially healthy enough to grow their payouts favors profitable companies with durable competitive advantages. And the fund finds yield. Its average dividend yield has measured about 30 percent higher than that of the Russell 1000 Value Index since the fund's inception in November 2005.” 

Overall, SDY has a large combined weight to high-yielding sectors, such as consumer staples, real estate and utilities. Those sectors combine for over 34 percent of the fund's weight, but SDY's dividend yield of 2.3 percent is not alarmingly high.

Stability Matters

Historically, stocks that consistently grow their dividends are less volatile than non-dividend payers, a theme SDY obliges.

“Despite its smaller market capitalization, the fund's tilt toward more-stable stocks has helped it shine during market downturns,” said Morningstar. “It held up better than the Russell 1000 Value Index and landed in the top quartile of the large-value category during the market drawdown from October 2008 to March 2009. The fund outpaced its category by 3.2 percent during the trailing 10 years through October 2017, primarily because of greater exposure to utilities stocks, smaller exposure to energy stocks and more favorable stock exposure within the financial sector.”

SDY currently allocates 14.5 percent of its weight to financial services stocks, its third-largest sector exposure.

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