Investors love dividends, but what is even better is a company with a long-standing commitment to boosting its payout.
Savvy income investors know the advantages of stocks that raise payouts in “set your clock by it” fashion. From 1972 through 2012 companies that initiated or consistently raised dividends outperformed and were less volatile than the companies either did not pay, cut or kept dividends stagnant, according to Ned Davis Research. [Dividend Growth Via ETFs]
Consistent dividend raisers are found in the various S&P Dividend Aristocrats indexes, including the S&P High Yield Dividend Aristocrats Index. The S&P High Yield Dividend Aristocrats Index is underlying benchmark for the SPDR S&P Dividend ETF (NYSEArca: SDY), one of the four largest U.S. dividend ETFs.
The $13.5 billion SDY holds firms that have a minimum dividend increase streak of 20 years, which is great, but does not completely insulate investors from risk.
“Still, there is no guarantee that they will continue to increase dividends in the future. At the start of 2008, right before the financial crisis, the fund had 38% of its assets in the financial sector, more than twice that of the S&P 500,” said Morningstar analyst Michael Rawson of SDY in a recent research note. “Several of its largest holdings, such as Comerica, cut their dividends in 2008 and saw their stock prices crater before this fund reconstituted its holdings.”
Dividend cutters or those firms that do not keep alive dividend increase streaks get booted from SDY when the ETF rebalances.
The ETF’s weight to financial services stocks is still high at almost 25% and that exposure is the byproduct of SDY holding insurance providers and real estate investment trusts that were not dividend offenders during the financial crisis. Additionally, SDY could prove sensitive rising interest rates due to its combined weight of 26.4% to the rate-sensitive consumer staples and utilities sectors. [Bond Proxy ETFs get Hit]
“The average dividend yield for stocks in the portfolio is higher than that of stocks in the S&P 500. Stocks with high dividend yields often pay out a large portion of their earnings, leaving less cash available to reinvest in the growth of their businesses. Stocks in the fund are expected to grow earnings by 8.5% compared with 9.9% for the S&P 500. Although the fund held up better than the broad market in 2008, the fund’s maximum drawdown starting in 2007 was about the same as the S&P 500,” according to Morningstar.
Earlier this year, SDY parted ways with Diebold (NYSE: DBD), Energen (NYSE: EGN) and Family Dollar (NYSE: FDO) while welcoming Albemarle (NYSE: ALB), CDK Global (NYSE: CDK), Essex Property (NYSE: ESS) Expeditors International (NasdaqGS: EXPD), Mercury General (NYSE: MCY), Realty Income (NYSE: O) and Ross Stores (NasdaqGS: ROST). [Changes for Some Dividend ETFs]
“However, high-yielding stocks can be risky. While the highest-yielding 30% of the market has outperformed since 1926, these stocks have also had a greater volatility than the broader market. Stocks with the highest dividend yields are often distressed and may be offering an attractive yield as compensation for risk,” according to Morningstar.
SPDR S&P Dividend ETF
