The purpose of this article will discuss the ETF SPDR S&P Dividend ("SDY")") and its attractiveness as an investment option. I wrote an article a few weeks ago on this ETF (see here) but I wanted to examine a few other areas as well as update some information. To reiterate, SDY is the ETF that seeks to match the characteristics of the S&P High Yield Dividend Aristocrats, which are companies that have increased their dividend payout every year, for the last 25 years. This is attractive for investors seeking a reliable, high yield. The most recent list of the ETF's current holdings is found below:
As of 04/18/2013
|Pitney Bowes Inc. (NYSE:PBI)||2.95%||23,184,012|
|AT&T Inc. (NYSE:T)||2.79%||8,270,944|
|Abbvie Inc. (NYSE:ABBV)||2.77%||7,345,208|
|Hcp Inc. (NYSE:HCP)||2.35%||5,108,356|
|Consolidated Edison Inc. (NYSE:ED)||2.27%||4,136,971|
|Kimberly Clark Corp. (NYSE:KMB)||1.98%||2,186,916|
|Clorox Co. Del (NYSE:CLX)||1.94%||2,452,427|
|Johnson & Johnson (NYSE:JNJ)||1.90%||2,553,760|
|Leggett & Platt Inc. (NYSE:LEG)||1.90%||6,652,627|
|Sysco Corp. (NYSE:SYY)||1.86%||6,075,229|
This represents over a 1/5 of the firm's holdings, and as you can see these are large, stable companies that tend to hold up well in recessionary periods. For example, since I wrote the last article on April 9th, SDY is up .30%. While this is not in itself an impressive return, the DJI is down during this period of .86%.
More on SDY's characteristics. In my mind, SDY rivals mutual funds because of its diverse holdings and professional management. A main difference to me is the expense for holding it. While many mutual funds charge in the range of 1-2% annually, the gross expense ratio for SDY is .35%, substantially lower, with will reflect real savings over a long-term investment period. Investors are able to get more of their own money investment, compounding any positive returns. Additionally, ETFs are more flexible than mutual funds with regards to their ability to trade. They can be bought and sold like stocks and typically have much lower commissions for doing so. Investors can also employ traditional stock trading techniques including stop and limit orders, margin purchases and short sales using ETFs. It is also diversified much like a mutual fund. According to its most recent report, SDY currently has 84 holdings. This number rivals, and in some cases beats, what most other funds or ETFs are able to offer.
However, ETFs are subject to risk similar to those of stocks including those regarding short-selling and margin account maintenance. This is a downside compared to mutual funds, but, of course, stocks held in typical mutual funds could be shorted anyway.
While SDY has done extremely well, both over the last year and year to date, the market is general has run-up a lot. SDY is not immune to an overall market correction. While the fall may not be as severe, the ETF could drop and I would suggest initiating a small position now, and adding to it over the next 3-6 months if a correction does occur. With all the head winds in Europe, the drop in gold and expected inflation (which is normally a negative stocks), and a lowering of consumer confidence in the U.S., this is likely to occur. SDY, along with other dividend funds such as (iShares Dividend Dow Jones Select Dividend (DVY), PGP, and RCS which I have previously written about, are all susceptible to the risk of major companies lowering their dividend payouts. I like SDY because this risk is low, given the fact that the companies in it have not decreased their payouts in 25 years, but there is still the risk.
As of 4/18, SDY is comprised of stocks from 10 different sectors, the largest three are: Consumer Staples with a weight of 19.67%, Financials with 15.91%, and industrials with 15.60%. While consumer staples and industrials are companies that provide steady cash flows and high dividends, I do not like the high weight on financials. With many banks used to mirror these characteristics, investors cannot forget the recent recession and the damage financial stocks had on the overall market. While the trend is changing, the financial sector will be the first to fall if sovereign debt issues in Europe worsen, or if unemployment rises and consumer confidence drops in the U.S.
Bottom-line: SDY provides investors with a diversified option to invest in strong companies that have a legacy history of returning money to shareholders in the form of dividends. Given its impressive track record, continued search for yield by investors, and number of holdings that rival many mutual funds, SDY is a very good option. With expenses that are a fraction of what many mutual funds and professional management companies charge, investors should look here first when thinking about long-term investment and retirement options.