The SPDR S&P Dividend ETF (NYSEArca: SDY), one of the largest U.S. dividend ETFs, is up just 4.6% year-to-date, a performance that lags the broader market, but income investors should not be hasty in dismissing SDY’s potential to generate better returns as 2017 moves along.

SDY 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.

While a rise in rates would diminish the attractiveness of dividend stocks with premium valuations and low growth, more high quality dividend payers or the group of dividend growers may stand out. The dividend growth exchange traded fund strategy has helped investors capture the upside potential of a strengthening equities market through quality company exposure.

“SDY is underperforming the broader market this year with a 5.5% return through June 2 vs. the S&P 500’s 9.9% gain, according to Morningstar Inc. The ETF’s five-year average annual return is 15.8%, closer to the S&P 500’s 16.3%. But over a 10-year period, SDY has returned an average of 7.6%, just ahead of the S&P 500’s 7%,” reports Nancy Gondo for Investor’s Business Daily.

Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return. Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return.

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