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.
Investors may also consider consistent dividend growers as a way to gain exposure to this group of quality companies as dividend growers and high quality stocks share a number of similar characteristics.
“Due to the index screen for 20 years of consecutively raising dividends, stocks included in the Index have both capital growth and dividend income characteristics, as opposed to stocks that are pure yield,” said State Street regarding SDY’s index methodology.
SDY looks appealing on a technical basis as well.
The ETF “climbed past a 90.02 flat-base buy point intraday Friday, before settling just below the entry. On Monday, it closed fractionally lower. The current three-month pattern began forming two weeks after a February breakout from a flat base. It advanced 2% between the two bases,” reports Investor’s Business Daily.
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