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Dividend Growth: The SPDR Dividend ETF Is One Of Many Ideas

Brian M. Nelson, CFA profile picture
Brian M. Nelson, CFA


  • The dividend is a symptom of a company’s free cash flow, and therefore not a driver behind an estimate of a company’s intrinsic value.
  • Dividend-paying and dividend-growing stocks have done very well in the past, but it may be equally important to pay attention to the underlying valuations of ideas, too.
  • You just can’t stop at analyzing the dividend payment. Don’t let the “yield” tail wag the “value” dog.

By Brian Nelson, CFA

There is a reason why we call ourselves Value-ntum. That's because we put value first!

But there are instances where share prices can catch sustained favor in part due to a dividend payment. The growth component of the dividend may also offer investors an ever-rising income stream, particularly if they find a company that expects to continue to grow the payout for a long time coming.

Even though we generally don't like speculative-themed exchange traded funds - as most ETFs are since they don't consider a price-versus-value component - the idea of the SPDR Dividend ETF (NYSEARCA:SDY) as an investment consideration is effectively three-fold, in our opinion.

1. A Basket of Strong, Competitively Advantaged Companies

For those that may not be familiar with this ETF, the SPDR Dividend ETF seeks "to provide investment results that, before fees and expenses, correspond generally to the total return performance of the S&P High Yield Dividend Aristocrats Index":

The S&P High Yield Dividend Aristocrats® index is designed to measure the performance of companies within the S&P Composite 1500® that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 years.

We may never feel comfortable holding AT&T (T), IBM (IBM) or even Target (TGT) by themselves, but in a diversified dividend growth ETF, we're more open to the concept, especially when some solid REITs such as Tanger Factory (SKT), Realty Income (O) and National Retail Properties (NNN) are also included in its top 10 holdings! The list of solid companies in this ETF is simply incredible (see more here xls).

2. The Companies It Holds Fit the Dividend Growth Theme to a T

The SPDR Dividend ETF includes a grouping of some fantastic companies that not only have the business models to support a growing

This article was written by

Brian M. Nelson, CFA profile picture
Brian Nelson is the president of equity research and ETF analysis at Valuentum Securities. He is the architect behind the company’s research methodology and processes, developing the Valuentum Buying Index rating system, the Economic Castle rating, and the Dividend Cushion ratio. Mr. Nelson has acted as editor-in-chief of the firm’s Best Ideas Newsletter and Dividend Growth Newsletter since their inception. Before founding Valuentum in early 2011, Brian worked as a director at Morningstar, where he was responsible for training and methodology development within the firm's equity and credit research department. Prior to that position, he served as a senior industrials securities analyst covering aerospace, airlines, construction, and environmental services companies. Before joining Morningstar in February 2006, Mr. Nelson worked for a small capitalization fund covering a variety of sectors for an aggressive growth investment management firm in Chicago. He holds a Bachelor's degree in finance and a minor in mathematics, magna cum laude, from Benedictine University. Mr. Nelson has an MBA from the University of Chicago Booth School of Business and also holds the Chartered Financial Analyst (CFA) designation. Highlights: Brian is frequently quoted in the media and has been a frequent guest on Nightly Business Report, Bloomberg TV, CNBC, and the MoneyShow. Mr. Nelson is very experienced valuing equities, developing discounted cash-flow models used to derive the fair value estimates for companies in the equity coverage universes of two of the largest independent investment research firms. Brian worked on a small cap fund and a micro cap fund that were ranked within the top 10th percentile and top 1st percentile within the Small Cap Lipper Growth Universe, respectively, in 2005. Brian led the charge in developing Morningstar's issuer credit ratings, creating and rolling-out one of the firm's proprietary credit metrics, the Cash Flow Cushion.----------Please read our Disclaimer that applies to all articles published on Seeking Alpha: http://www.valuentum.com/categories/20110613 Follow us on Twitter: @Valuentum

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Realty Income is included in Valuentum's simulated newsletter portfolios, the Dividend Growth Newsletter portfolio and the High Yield Dividend Newsletter portfolio.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (7)

But will holding an ETF like NOBL, SDY and VIG actually produce growing dividends paid to the investor in the same manner as holding the individual stocks (or some of them)?

In other words: Can you expect a dividend hike each year?
I am a non-resident of the US and am not familiar with US tax laws. Do dividends from long term gains receive preferential tax treatment? On my recent statement, there was 30% tax withheld at source for the regular dividend and the short term capital dividend but not for the long term dividend. It almost seems like long term capital dividends are treated more like a capital gain than income....That makes a huge difference....
In looking at dividend yield, for SDY, one has to also consider the special dividends issued each December. The 2017 quarterly dividends were $0.44, $0.51, $0.52 and $0.63. In addition, on Dec. 18, 2017, there was a short term capital gain dividend of $0.77 and a long term capital gain dividend of $1.56. That brought the total for 2017 from $2.10 to $4.43. In 2015, these two special dividends totaled $2.60. And I think the long term capital gain dividend receives favorable tax treatment too.
Robert Allan Schwartz profile picture
"In looking at dividend yield, for SDY, one has to also consider the special dividends issued each December."

Special dividends are nice, but they are unpredictable.
Retired folks living off their dividends (e.g. me) cannot depend on special dividends.
MoneyMadam profile picture
Living: Those are capital gains distributions. M*
Robert Allan Schwartz profile picture
Hi Brian,

I'm not disagreeing with anything you've said, but I will point out that SDY's current yield is 2.23%, and it is not difficult to own a portfolio of DGI companies with a higher yield, without "reaching for yield" or increasing risk.


MoneyMadam profile picture
Ditto Mr. Schwartz' comment. M*
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