ETF Talk: Rising High-Yield Dividend Fund Offers Income

Doug Fabian

Doug Fabian is known for his expert knowledge of ETFs, bear funds and enhanced index funds to profit in any market climate.

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If you are like me, the low interest rates that banks are paying on federally insured deposits are causing you to look elsewhere to put your money. In fact, German government bonds have begun to pay negative interest rates. One alternative that I see on the immediate horizon is the high-yield SPDR S&P500 Dividend ETF (SDY), which could be a golden ticket to higher dividend payments this year. To that end, SDY is yielding 4.89%, while banks uniformly seem to be paying depositors less than 1% interest.

As the chart below shows, SDY has been trending upward. After dipping to its yearly low of $53.35 on June 4, SDY began an impressive jump upwards to finish at $57.50 on Aug. 21. The exchange-traded fund (ETF) is up 8.37% year-to-date. It now is trading above its 50-day moving average, showing that the fund has momentum on its side.

The SPDR S&P500 Dividend ETF (SDY) seeks to replicate the price and yield of the S&P High Yield Dividend Aristocrats Index, investing in stocks of companies that are within the S&P Composite 1500 and have followed increasing dividend policies for 25 years. Diversified across several different sectors, SDY’s $9.27 billion in assets primarily are invested in large value companies. As of Aug. 20, five sectors comprised 74.1% of SDY’s assets: Consumer Staples, 21.13%; Industrials, 16.45%; Financials, 15.85%; Consumer Discretionary, 10.74%; and Materials, 9.93%.

The relative strength of the underlying stocks in SDY is reflected by the fund’s low beta of 0.98, indicating low volatility in rough market conditions. SDY’s top five holdings, as of yesterday, were: Avon Products Inc. (AVP), 2.94%; Pitney Bowes Inc. (PBI), 2.82%; AT&T Inc. (T) 2.50%; Leggett & Platt Inc. (LEG) 2.34%; and HCP Inc. (HCP) 2.24%.

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Despite using a diversification strategy, SDY’s portfolio turnover rate is a surprisingly high 52%. This higher-than-average turnover rate signals concerns about reduced potential returns from so much trading. Still, with a strategy of holding stocks that are consistently increasing their dividend payments, the ETF’s risk may be worth the reward.

While SDY’s total annual operating expense rate of 0.52% is slightly higher than similar ETFs, the fund’s impressive increase of 2.53% in the past month indicates that its returns likely will continue to outweigh the expenses. SDY’s holdings could give investors relief from volatile markets and offer returns that are difficult to find in these times of anemically low interest rates.

There is reason for concern about the stock market. Today, the non-partisan Congressional Budget Office (CBO) released new warnings that the U.S. economy could slip into recession. The CBO reported that the U.S. economy would contract by 0.5% in calendar year 2013 if the George W. Bush-era tax rates expire and automatic spending cuts are implemented. The CBO also cautioned that unemployment could rise to 9.11% in 2013, compared to 8.2% now. A benefit of owning SPY is that dividend-paying stocks and funds typically do not fall as much as non-dividend payers when the market drops.

If you want my advice about buying and selling specific ETFs, including appropriate stop losses, please consider subscribing to my ETF Trader service. As always, I am happy to answer your questions about ETFs, so do not hesitate to email me by clicking here. You just may see your question answered in a future ETF Talk.

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For the past six weeks, stocks have managed to mount what I call a “stealth rally,” meaning that there hasn’t been widespread participation from either individual investors or professional money. True, there is a bid on stocks here due to optimism over the possibility of more QE from the Fed, as well as a resolution to Europe’s fiscal mess from the upcoming European Central Bank meeting. However, I don’t think we can read too much into the sentiment here given the low volatility and sm

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