Taking a Long, Hard Look at High-Dividend ETFs

Jim Woods

Jim Woods has over 20 years of experience in the markets from working as a stockbroker, financial journalist, and money manager.

Low-cost, high-dividend exchange-traded funds (ETFs), such as the SPDR S&P Dividend ETF (SDY), can help investors find extra income from dividend payments without the risk of having to choose among individual dividend-paying stocks.

While individual companies can often pay much more tempting yields than an ETF, with some offering dividend yields of between 5-10%, no company and no stock is immune to market volatility. It is a lot riskier to “put all your eggs in one basket” than to spread out risk through a dividend-paying ETF, which can hold several hundred companies in its portfolio that all pay dividends.

Simply put, investors who receive dividend payments from multiple companies via an ETF will be only marginally affected when one or even several companies stumble, decrease in share price and potentially fail to deliver on dividend obligations. This fact can make dividend ETFs very attractive to risk-averse investors.

Of course, the major concern facing any dividend-paying stock or ETF is a company cutting or omitting its dividend payment, a real threat in uncertain economic and financial times. While a dividend ETF is less affected by this risk, it is not immune to this problem, especially as these funds offer reduced yields. According to Seeking Alpha, 39 companies announced dividend cuts in July and August 2017 alone, and another 21 omitted a payment.

SDY’s partial solution to the threat of dividend cuts is to screen for stocks that have at least two decades of consecutive dividend increases, as this implies that the companies paying the dividend can back up the payment with capital growth. Remember that S&P 500 stocks that pay dividends for 25 years or more are considered “Dividend Aristocrats.”

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In terms of performance, SDY has lagged the S&P 500’s year-to-date gain of 11.5%, generating a gain of only 5.22%. However, while the fund will not be dropping the jaws of market analysts anytime soon, its performance over the last few years has been quite respectable — roughly doubling in share price in five years. Also, as the chart below shows, there have been no significant and troubling dips during that time. SDY pays a 2.48% yield and has an expense ratio of 0.35%, which is higher than that of other dividend funds, such as those maintained by Vanguard.

With $15.4 billion in net assets, SDY’s portfolio is made up of just over 100 dividend-paying companies with some allocation to all sectors of the market. Its biggest sector holdings are : Financials, 14.75%; Industrials, 14.74%; and Consumer Staples, 14.51%. The fund’s 11% allocation to the struggling Utilities sector may be a concern to some investors.

No position in SDY comprises more than 3% of total assets. The fund’s top holdings show a fair bit of diversification, as well as some household names. They include: AT&T (T), 2.26%; Target (TGT), 2.07%; National Retail Properties (NNN), 1.97%; Tanger Factory Outlet Centers (SKT), 1.96%; and Chevron Corporation (CVX), 1.90%.

Investors looking to invest in a basket of companies with two decades of reliable dividend payments may want to consider the SPDR S&P Dividend ETF (SDY).

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