The SPDR S&P Dividend ETF (NYSEArca: SDY), one of the largest U.S. dividend exchange traded funds, has multiple attributes long-term income investors look for when evaluating dividend funds.
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 SDY mandates member firms have dividend increase streaks of at least 20 years, many of its 111 holdings have longer payout increase streaks than that.
“While the hurdle for index inclusion is 20 straight years of increasing dividends, the index average is 35.9 years,” said S&P Dow Jones Indices. “Additionally, there are eight constituents with over 55 consecutive years of dividend increases. This impressive consistency suggests a certain amount of financial strength and discipline, which may provide some downside protection in turbulent markets.”
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. Dividend growers also perform less poorly in times of market duress.
“Looking at the period from Dec. 31, 1999, to Dec. 29, 2017, when the market (as represented by the S&P Composite 1500) was down, the S&P High Yield Dividend Aristocrats outperformed the S&P Composite 1500 by an average of 161 bps per month,” according to S&P Dow Jones. “When we focused on the 15 worst-performing months for the S&P Composite 1500 during the same period, the protection provided by the S&P High Yield Dividend Aristocrats appeared prominent. Its monthly outperformance was 308 bps against the S&P Composite 1500.”
Consumer staples and financial services stocks both account for more than 15% of SDY’s weight while the industrial and utilities sectors combine for over 27% of the fund’s weight. None of SDY’s holdings account for more than 2.3% of the ETF’s weight. SDY’s dividend yield is 2.33%.
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