Dividend ETF Weights Stocks by Yield

November 27th at 6:37am by Tom Lydon

SPDR S&P Dividend ETF (NYSEArca: SDY) is made up of companies that have a consistent history of boosting their dividends annually for the past 25 years. The exchange traded fund sharpens its income focus even more by weighting individual stocks by their dividend yield.

The ETF allows investors to purchase a basket of dividend stocks with one trade and low fees. SDY has a gross expense ratio of 0.35%, according to manager State Street Global Advisors.

“The fund’s yield-weighting produces an idiosyncratic portfolio with a strong mid-cap flavor. For instance, the $3.4 billion market-cap Questar Corporation (NYSE: STR) has a greater weight than the $185 billion Procter & Gamble Company (NYSE: PG). Consequently, the fund may occasionally move out of step with its large-cap value brethren. If you’re okay with high tracking error relative to the market, this fund could be a decent core holding. For everyone else, this is a satellite holding,” Samuel Lee wrote for Morningstar in a profile of the ETF. [Why Dividend ETFs Remain Popular]

SDY isn’t the only dividend ETF to weight stocks by their yield, rather than by market capitalization like most traditional equity benchmarks such as the S&P 500.

Dividends can provide crucial extra return, especially in a sideways market. Also, dividend-themed ETFs have been popular due to very low interest rates in the bond market.

Dividend investing centers on the reasoning that investors are going to gather income today rather than bank on capital appreciation tomorrow, reports Lee. Also, historically, dividends have outperformed non-paying companies over long term periods of time. The low yield climate that we have been faced with over the past few years illustrates how important dividends can be for a portfolio. [Dividend ETFs: What Obama Means for Tax Rates]

SDY does have a mid-cap focus, so risk-averse investors may want to consider the fund for a satellite holding, if they prefer to have a large-cap focus. SDY has a dividend yield of 3.2%, which isn’t the highest yielding, but is still appealing. Selena Maranjian for The Motley Fool reports that SDY has a low turnover rate of 0.25%, indicating that the fund does not re-balance frequently and keeps transaction costs low. [Dividend ETFs 2.0]

Even under the worst case scenario regarding the looming fiscal cliff, dividend ETFs are still projected to remain popular even with a rise on the dividend tax rate. According to S&P Capital, corporate America is expected to choose to increasingly utilize cash for special dividends before the new law takes effect, or for stock repurchases.

Other comparable dividend ETFs:

  • iShares Dow Jones Select Dividend (NYSEArca: DVY)
  • Vanguard Dividend Appreciation ETF (NYSEArca: VIG)
  • WisdomTree Total Dividend (NYSEArca: DTD)

SPDR S&P Dividend ETF

 

Tisha Guerrero contributed to this article.

Full disclosure: Tom Lydon’s clients own DVY.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.