The SPDR S&P Dividend ETF (NYSEArca: SDY), one of the largest U.S. dividend exchange traded funds, resides in the pantheon of dividend ETFs because income investors love the fund’s emphasis on steadily rising payouts.
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.
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.
“The fund’s focus on firms that are financially healthy enough to grow their payouts favors profitable companies with durable competitive advantages,” said Morningstar. “And the fund finds yield. Its average dividend yield has measured about 30% higher than that of the Russell 1000 Value Index since the fund’s inception in November 2005.”
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.
“Despite its smaller market capitalization, the fund’s tilt toward more-stable stocks has helped it shine during market downturns. It held up better than the Russell 1000 Value Index and landed in the top quartile of the large-value category during the market drawdown from October 2008 to March 2009. The fund outpaced its category by 3.2% during the trailing 10 years through October 2017,” according to Morningstar.
SDY has a dividend yield of 2.33% and an annual expense ratio of 0.35%, or $35 on a $10,000 investment.
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