Market Overview

This Dividend ETF Is Still Royal

This Dividend ETF Is Still Royal

With Treasury yields in free fall and the yield on the S&P 500 barely more impressive, dividend exchange traded funds are receiving renewed attention, but investors may be better served by emphasizing reliable growth over tantalizingly higher dividend yields.

What Happened

The SPDR S&P Dividend ETF (NYSE: SDY) tracks an index that purports to be a high-yield benchmark, but in reality, dividend growth is what makes SDY attractive for long-term income investors looking to reduce portfolio volatility.

SDY tracks the S&P High Yield Dividend Aristocrats Index. Obviously, that benchmark has “high yield” in its name, but SDY's dividend yield of 2.36% is not alarmingly high. Rather, the source of allure with the fund's 112 components is that they have minimum dividend increase streaks of 20 years.

“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,” according to State Street.

Why It's Important

SDY's look back means the fund is lightly allocated to technology stocks because that sector is still a new entrant to the dividend fray, but there aren't many other marks against the fund.

“On the plus side, that screen keeps its portfolio focused on financially stable, shareholder-friendly firms,” said Morningstar in a recent note.

Additionally, while the weighted average market value of SDY's holdings is $56.24 billion, the fund features robust exposure to steady but smaller dividend payers.

“While the fund lands in the large-value Morningstar Category, it has a much larger allocation to midsize and small firms than does its typical peer; that's because its baseline index is all-cap rather than strictly focused on large stocks,” according to Morningstar.

What's Next

Hopefully, SDY's ability to weather market storms and perform less poorly than broader benchmarks when stocks soon will not be tested anytime soon, but for long-term investors, it's nice to know the ETF has a verifiable record of holding up somewhat well during turbulent times.

“The fund has still held up well in periods of market weakness. The fourth quarter of 2018 was a recent case in point: The fund lost less than 8%, whereas the S&P dropped nearly 14% during that volatile three-month period,” notes Morningstar.

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