With government bond yields still low and the Federal Reserve poised to cut interest rates this year, some high dividend strategies and the related exchange traded funds are increasingly attractive to income investors.
The SPDR Portfolio S&P 500 High Dividend ETF (NYSEArca: SPYD) is an ETF to consider. SPYD tries to reflect the performance of the S&P 500 High Dividend Index, which is comprised of the top 80 dividend-paying securities listed on the S&P 500 Index, based on dividend yield.
SPYD, which is nearly four years old, has an annual fee of just 0.07%, making it one of the cheaper dividend ETFs on the market today.
“Screening stocks based on dividend yield is risky business,” said Morningstar in a recent note. “A rising yield is often an indication that the market has soured on a firm’s prospects. It may be hitting a rough patch, or it may be fundamentally impaired. Whatever the case might be, many investors don’t want to stick around to find out and must accept lower prices from buyers in order to offload their shares.”
SPYD ETF Details
SPYD holds 80 stocks and has a dividend yield of 4.43%, or more than double the yield on the S&P 500. None of SPYD’s holdings exceed weights of 1.86%.
The fund allocates over 21% of its weight to the real estate sectors and over 27% of its combined weight to the consumer discretionary and utilities sectors.
“In the case of the S&P 500 High Dividend Index, its yield orientation and absence of sector constraints result in significant sector bets, which could result in significant interest-rate risk,” said Morningstar. “At just over 21%, SPYD’s allocation to real estate stocks is more than 7 times greater than the S&P 500’s. Its near-13% allocation to utilities stocks is nearly 4 times that of its selection universe. Both sectors are particularly interest-rate-sensitive and could face near-term headwinds during a period of rising rates.”
With over 34% of its weight tied to the rate-sensitive real estate and utilities sectors, SPYD appears poised to benefit from a Fed rate cut.
For more on ETF investing plays, visit our Core ETF Channel.