Market Overview

Yield And Steady Payout Growth In This Dividend ETF

Yield And Steady Payout Growth In This Dividend ETF

With 10-year Treasury yields hanging around 1.5% and the dividend yield of 1.85% on the S&P 500 hardly intoxicating, investors are again embracing dividend stocks and exchange traded funds. While the environment seems ripe for high dividend strategies, growth may still be the way to go.

What Happened

The SPDR S&P Dividend ETF (NYSE: SDY) tracks the S&P High Yield Dividend Aristocrats, which obviously implies a high yield component, but in reality, SDY is a dividend growth play because the qualifier for that index is 20 consecutive years of dividend growth.

Still, the $18.65 billion SDY, one of the largest domestic dividend ETFs, yields 2.41% and these days, that's considered decent.

SDY's “index is designed to track a basket of stocks from the S&P Composite 1500 that have consistently increased their total dividends per share every year for at least 20 consecutive years,” said S&P Dow Jones Indices in a recent note.

Historical data confirm that SDY's index has frequently sported a higher dividend yield than the S&P Composite 1500.

Why It's Important

High-yield strategies may seem alluring, particularly with Treasury yields falling, but some high dividend stocks come by way of companies with flimsy balance sheets and that can lead to payout cuts and suspensions. Additionally, high-yield ETFs are usually more volatile than dividend growth rivals. For example, SDY has been less volatile than the yield-based Dow Jones U.S. Select Dividend Index over the past three years.

SDY has achieved that status while its index has offered better yields and lower volatility than broader benchmarks.

“The S&P High Yield Dividend Aristocrats has consistently had higher yields than its benchmark,” according to S&P Dow Jones. “The average yield of the index was 3.5%, ranging from 2.5% to 5.8%. In contrast, the average yield of the S&P Composite 1500 was 1.8%, with a range from 1.5% to 2.8%. On average, the dividend yield gap between these two indices was 1.7%.”

What's Next

For income investors searching for yield, SDY is a suitable bond alternative because, as of the end of July, the fund's index yields was above those of 3-month and 10-year Treasuries as well as a major aggregate bond index.

Additionally, SDY is not doing this via high concentration to high-yield sectors, such as utilities and real estate. Those groups combine for less than 18% of the ETF's roster.

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