Maryna Terletska/Moment via Getty Images
Maryna Terletska/Moment via Getty Images
The SPDR S&P Dividend ETF (NYSEARCA:SDY) is a passively managed ETF seeking to provide yield and capital appreciation to its investors rather than focusing only on yield. SDY tracks the S&P High Yield Dividend Aristocrats Index ("Index"), which is comprised of the highest yielding S&P Composite 1500 of stocks that have increased their dividends for at least 20 consecutive years. Companies that have increased dividends for over two decades provides a measure of quality, this simplistic process can lead to a value trap, too. Judging SDY's near and long-term performance against its main competitors (NOBL, SCHD, VIG), we rate SDY a Hold.
SDY is comprised of roughly 140 stocks that have been picked from the Index with the highest yields and has increased its dividends every year for at least 20 years. The stocks are then yield-weighted, which means the cheaper stocks are weighted more heavily in the ETF. As any long-term investor can attest, a cheap stock can always get cheaper and can run the risk of falling into a value trap. A value trap can arise when a company appears cheap fundamentally but has underlying earnings or cash flows that do not warrant a high dividend payout ratio. We believe having the screening factor of 20+ years as a dividend payer and increasing the dividend, if only by a penny a year, offers investors some quality fallback floor. However, we believe there are better investment alternatives in the space and will elaborate below.
| Name | Shares Held | Weight |
|---|---|---|
| 3M CO (MMM) | 4,808,533 | 2.24% |
| REALTY INCOME CORP (O) | 7,963,219 | 2.06% |
| EDISON INTERNATIONAL (EIX) | 5,469,660 | 1.77% |
| INTL BUSINESS MACHINES CORP (IBM) | 1,906,773 | 1.76% |
| ABBVIE INC (ABBV) | 1,990,127 | 1.73% |
| CHEVRON CORP (CVX) | 2,282,574 | 1.73% |
| SOUTHERN CO/THE (SO) | 4,782,983 | 1.62% |
| KIMBERLY CLARK CORP (KMB) | 2,688,285 | 1.60% |
| EXXON MOBIL CORP (XOM) | 3,117,302 | 1.59% |
| WEC ENERGY GROUP INC (WEC) | 4,100,111 | 1.58% |
*Source SDY Factsheet
As SDY does not have a large concentration in any one stock. Its top 10 holdings only represent 18% of the total. But, we note its largest holding is 3M (MMM) at 2.2% weight. MMM pays a generous dividend yield, but has forecasted earnings growth, which can give investors little hope for price appreciation. Indeed over the last 1, 3, 5, and 10-year periods, MMM has offered investors only negative total-return results, despite its generous yield and payout ratio.
3M Co.
| 1-YR Total Performance | 3-YR Total Performance | 5-YR Total Performance | 10-YR Total Performance |
| -14.2% | -40.8% | -45.2% | -3.0% |
*Source Seeking Alpha
SDY has three primary competitors: ProShares S&P 500 Dividend Aristocrats ETF (NOBL), Schwab U.S. Dividend Equity ETF (SCHD), and Vanguard Dividend Appreciation Index ETF (VIG). SCHD and VIG are the darlings and behemoths in the space with $54 billion and $80 billion AUM respectively, while SDY and NOBL command $19 billion and $11.5 billion AUM. All four provide ample liquidity should any market downturns or drawdowns occur.
Clearly, SCHD and VIG have outperformed their smaller comps in terms of total performance (dividend + price appreciation) as shown in the chart below. While past performance is not indicative of future performance, it is worth noting that SDY has underperformed its peers across every short and long-term time frame we compared.
| ETF | 1-YR Total Performance | 3-YR Total Performance | 5-YR Total Performance | 10-YR Total Performance |
| SDY | -3.14% | 19.3% | 43.6% | 142.2% |
| NOBL | 3.2% | 23.1% | 59.2% | 167.5% |
| SCHD | 1.64% | 25% | 76% | 191.2% |
| VIG | 12.7% | 28.8% | 78% | 188.6% |
*Source Seeking Alpha
There are a couple of reasons that could highlight the performance deviations of the ETFs. One is the sector breakdown: where does the investment strategy place its bets? Analyzing the top 60ish % of holdings, it's clear that SCHD and VIG are placing greater weights on Technology and Health Care and less on Consumer Defensives and Utilities than SDY. Technology and Health Care tend to be higher growth sectors.
| Sector Holdings of the Rough Top 60% of the ETF | SDY | NOBL | SCHD | VIG |
| Industrials | 20% | 24% | 17% | |
| Consumer Defensives | 17% | 24% | ||
| Utilities | 16% | |||
| Financials | 10% | 17% | 19% | |
| Health Care | 11% | 17% | 15% | |
| Technology | 13% | 24% |
*Source Seeking Alpha
The relationship between top-line and bottom-line forecasted growth also holds some insights into earnings and dividend quality. An analyst would want to see revenue growth convert to earnings growth. When EPS growth is higher than revenue growth, this suggests there is a top-line struggle and the companies are using operating margins to grow EPS rather than investing in their businesses and growing organically. This can translate to dividends more sustained by accounting rather than a growing business model. The chart below shows SDY and VIG with potentially better earnings quality compared to NOBL and SCHD. VIG has a better cushion for dividend payout than all four ETFs.
| SDY | NOBL | SCHD | VIG | |
Forecasted Revenue Growth (weighted average 1Yr) | 9.3% | 10% | 12.5% | 12.2% |
| Forecasted EPS Growth (weighted average 1YR) | 9.5% | 13.9% | 18.1% | 10.9% |
*Source, Propriety Internal Forecasted Data
SDY is a well-diversified dividend aristocrat ETF that pays a stable quarterly dividend yield. However, its sector picks are more defensive than its main competitors which potentially translates to slower earnings and revenue growth. In addition, by only investing in the highest-yielding companies in its Index and yield-weighting its composition, SDY runs the risk of falling into a potential value/yield trap. SDY's dividend yield (2.7%) and TTM growth rate (3%) are rated C+/C- by Seeking Alpha's quantitative metrics. For these reasons, we rate SDY a Hold and a future candidate for reduction based on market conditions.
Should market conditions slow significantly and a potential recession be forecast, SDY's more defensive sector holdings could outperform more growth-orientated sectors held by its competing EFTs. On the downside to SDY, should the long-talked-about interest rate easing occur, SDY could depreciate in price relative to its peers, causing us to potentially change our Hold to a Sell.