A slew of dividend exchange traded funds (ETFs) have recently been hitting all-time highs, including the SPDR S&P Dividend ETF (NYSEArca: SDY). SDY is up just over 13% this year.
SDY, one of the largest U.S. dividend ETFs, holds firms that have a minimum dividend increase streak of 20 years. Moreover, SDY follows a yield-weighting methodology that allocates a larger weight toward those with higher yields, so the portfolio leans toward more mid-sized companies. Historical data confirm that dividends are major contributors to investors’ long-term, total returns.
For long-term investors, there remains plenty of allure regarding dividend growth strategies.
“But the real appeal of dividend growers may be more apparent when the going gets tough–not when it’s as easy as the past 10 years have been,” said Morningstar in a recent note. “That’s because firms with a history of dividend growth over a prolonged stretch (many funds target 10 years’ worth of dividend hikes) tend to be highly profitable, financially healthy businesses.”
SDY devotes just over 34% of its combined weight to industrial and financial services stocks. The consumer staples and utilities sectors, which are often prized for above-average yields, combine for almost 24% of SDY’s roster. Dividends also provide buffers against market volatility.
Points Of Interest
Due to SDY’s lengthy dividend increase streak requirement, the fund does not feature exposure to the likes of Apple Inc. (NASDAQ: AAPL) and Microsoft Corp. (NASDAQ: MSFT), which have been stellar dividend growers in recent years, but do not yet have dividend increase streaks of at least 20 years. Technology is SDY’s second-smallest sector weight at 3.35%.
“On the plus side, that screen keeps its portfolio focused on financially stable, shareholder-friendly firms,” said Morningstar. “While the fund lands in the large-value Morningstar Category, it has a much larger allocation to midsize and small firms than does its typical peer; that’s because its baseline index is all-cap rather than strictly focused on large stocks.”
The weighted average market value of SDY’s components is over $55 billion.
“Despite that emphasis, the fund has still held up well in periods of market weakness. The fourth quarter of 2018 was a recent case in point: The fund lost less than 8%, whereas the S&P dropped nearly 14% during that volatile three-month period,” according to Morningstar.
For more information on dividend stocks, visit our dividend ETFs category.