The SPDR S&P Dividend ETF (NYSEArca: SDY), one of the largest U.S. dividend exchange traded funds, and is popular with dividend investors due to its emphasis on payout consistency. 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.
“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.
“Inflation has remained stubbornly low, which makes the dividends paid by SDY all the more valuable. Furthermore, weak inflation readings will make the Fed less likely to raise interest rates,” according to a Seeking Alpha analysis of SDY.
Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.
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. Over the past 40 years, companies that boost payouts have proven to be less volatile than their counterparts that cut, suspended or did not initiate or raise dividends.
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SDY holds almost 110 stocks, about 30% of which hail from the consumer staples and financial services sectors. Industrial and utilities names combine for 26% of the ETF’s weight. Investors are waiting for the benefits of SDY’s financial sector exposure to become apparent as the ETF is up 3% this year despite two rate hikes by the Federal Reserve.
“The benefit of holding financial companies during a rising rate environment is because as the economy improves and rates go up, banks and other financial firms increase the rate at which they charge for loans and other products at a faster pace than what they pay out for deposits. This will increase their interest rate spread and overall profitability, all other things being equal,” according to Seeking Alpha.
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