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The purpose of this article is to determine the attractiveness of SDY as an investment option at its current levels. SDY has been an ETF favorite of mine, and I have written a few articles in favor of the fund, seen here and here. However, a month has past since these articles were written and SDY, along with the market as a whole, have risen sharply. I want to examine whether the fund is still a buy at these levels, or if investors would be better suited to wait for a drop in share price before initiating new positions.

To start, a little about SDY. 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 ETF has performed very strongly. Even with today's drop in the market, and excluding dividends, SDY is still up almost 20% year to date and over 30% over the past 52 weeks. Clearly, investing in SDY has been a profitable play. However, there are some concerns I have going forward that would make me caution investors who are thinking about initiating a new position. While I would not advise current investors to abandon ship, I believe investors will be able to pick up SDY at a better price over the next few months.

First, given the fund's stellar performance, SDY's yield is now under 3%. That is my personal benchmark when looking for dividend paying stocks or ETFs, so the fact that the yield is under this level would make me hold off on this particular investment. However, one of the reasons for the drop in yield is that the quarterly payment has dropped. This is counterintuitive to me since SDY is only supposed to hold stocks that have close to perfect track records on dividends. However, after increasing the dividend payout each quarter in 2012, the payout dropped in the first quarter of 2013, and still sits at that level today. Here is a chart of SDY's recent dividend history:

03/15/2013: $0.3553

12/21/2012: $0.5831

09/21/2012: $0.4745

06/15/2012: $0.4491

03/16/2012: $0.4025

One of SDY's problems, or benefits depending on how you look at it, is that the fund does not rebalance itself often when compared to actively managed mutual funds. While this keeps expenses low, it also can cause certain stocks to become overweight in the fund, and also to hold on to stocks that may have cut their dividends, instead of being immediately expelled. Both of these scenarios seem to being playing out with Pitney Bowes' (NYSE:PBI) inclusion in the fund. Here is a current list (as of 5/20/13) of SDY's holdings:

NAMEWEIGHTSHARES HELD
Pitney Bowes Inc2.49%20,349,914
At&T Inc2.45%8,165,675
Hcp Inc2.29%5,200,244
Abbvie Inc2.18%5,848,364
Consolidated Edison Inc2.05%4,181,919
Air Prods & Chems Inc1.84%2,408,565
General Dynamics Corp1.83%2,890,363
Leggett & Platt Inc1.78%6,527,370
National Retail Pptys Inc1.78%5,326,222
Kimberly Clark Corp1.74%2,098,176

As you can see, PBI is the largest holding, yet the company just recently halved its dividend and the stock has been experiencing heavy selling pressure since it reported earnings. This clearly is a drag on SDY's performance and is probably one of the reasons why SDY's payout has not been rising steadily, as in the past. Until SDY removes PBI, or at least limits its holding and exposure, I would not initiate new positions in the fund. I would expect this to happen in the near future, but it is negative for the stock short-term.

Additionally, I believe the market is overdue for a correction. While I have been saying this for some time, and thus have been wrong, I am extremely cautious with the Dow over 15,000. I think volatility has been low for too long and problems in Europe are not going away and are eventually going to pressure the market. Additionally, Bernanke's comments that stopping stimulus would hurt the recovery makes me believe that our economic recovery is not as strong as imagined, and is being artificially propped up. I like to invest based on fundamentals, and if these fundamentals are showing signs of weakness, I will wait for a better moment.

Bottom line: SDY has been enormously popular with investors and has performed very strongly. Overall, I like this ETF long-term because it provides stability, a legacy of high yields, and has outperformed the broader market. Its main sectors are consumer staples, industrials and financials and these are all areas that investors definitely want to be exposed to. Additionally, SDY provides a low cost way to diversify. However, with a shrinking yield and its largest holding being a company that recently cut its dividend, I think SDY will see some downward movement in the short-term. When that happens, it will provide investors with an excellent chance to add to their investment and benefit for the long-term.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in SDY over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: Is SDY Still A Buy?