Editor’s Note: This article is courtesy of Todd Rosenbluth, S&P Global Market Intelligence Director of ETF Research.
The S&P Global Market Intelligence Focus ETF for July is SPDR S&P Dividend (SDY), a passively-managed offering focused on companies with consistent dividend growth. SDY garners an Overweight ranking based on a combination of holdings-level analytics and ETF analysis.
With the yield on the 10-year Treasury recently below 1.5%, investors have been seeking out alternative income strategies. Amid global economic concerns, tied in part to the Brexit vote, S&P Global Market Intelligence thinks a focus on companies with a consistent long-term record of dividend growth has merit.
S&P Dow Jones Indices, which operates independently from S&P Global Market Intelligence, runs the S&P High Yield Dividend Aristocrats Index used by SDY. The index consists of large-, mid- and small-cap companies in the S&P 1500 index and changes are made annually to reflect changes in dividend policy, when companies reach the 20-year milestone or join the broader ‘1500’. By raising dividends for 20-plus years, constituents in the S&P High Yield Dividend Aristocrats index have proven that returning additional cash to shareholders is a priority, regardless of the market environment.
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Nine companies were added in 2016, including mid-cap consumer staples Lancaster Colony (LANC) and mid-cap financial Renaissance Re Holdings (RNR); LANC last raised its dividend in the fourth quarter of 2015, while RNR hiked in the first quarter of 2016.
Meanwhile, many of SDY’s holdings increased their dividend in the second quarter, extending the long records. For example, WW Grainger (GWW), an industrial company, declared a 4.1% higher payout in April 2016. It was the distributor’s 44th straight increase; GWW has a 2.2% dividend yield.
Also in April, health care constituent Johnson & Johnson (JNJ) announced its latest dividend hike, 6.7%. This extended the firm’s streak to 53 years; JNJ sports a 2.7% dividend yield.
JNJ’s longevity of raising the dividend matches that of fellow SDY holdings 3M (MMM) and Procter & Gamble (PG), which yield 2.6% and 3.2%, respectively.
[related_stories]SDY’s 108 holdings are diversified across sectors, though financials (24% of assets), industrials (15%), utilities (14%) and consumer staples (13%) are the highest; information technology, at 4%, is relatively low compared to the broader S&P 1500 index.
While many of the ETF’s positions are hold recommendations from S&P Global Market Intelligence, limiting the upside potential, our favorable ranking is aided by strong risk considerations and cost factors at the ETF and holdings level.
SDY earns positive ranking inputs for the S&P Global Market Intelligence Quality Ranking and Qualitative Risk Assessment of its holdings; the former is quantitative based on earnings and dividend records, while the latter is qualitative from our equity research team. In addition, the ETF’s constituents have strong credit profiles, as assessed by S&P Global Ratings.
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Further helping the ETF are its below-average volatility and modest bid/ask spread of $0.02. SDY is also trading well above its 200-day moving average and has bullish technical tendencies. The ETF has a 0.35% expense ratio.
In 2015, SDY declined 0.7%, lagging the 1.0% gain for the S&P 1500 index. However, year to date, SDY’s 13.2% increase is much stronger than the 2.7% for its parent index.
We encourage investors seeking exposure to companies with long record of dividend growth to look closely at what’s inside SDY and not just its performance.