ETFs
The SPDR Portfolio S&P 500 High Dividend ETF Has High-Risk Dividend Stocks – Is It Still Worth Buying?
The SPDR Portfolio S&P 500 High Dividend ETF focuses on high-yielding stocks, but that doesn’t mean it will be the best choice for your portfolio.
With a dividend yield of around 4.4%, the SPDR Portfolio S&P 500 High Dividend ETF (SPY -0.32%) lives up to its name. For comparison, the SPDR S&P 500 ETF Trust (TO SPY -0.12%) has a yield of just 1.3%. You need to understand how the high dividend ETF achieves three times higher yield than the broader ETF. S&P 500 Index before buying it.
This high-dividend ETF has a simple approach
The SPDR Portfolio S&P 500 High Dividend ETF is a fairly simple exchange-traded fund to understand. It simply selects the 80 highest values dividend yields of the S&P 500.
The stocks selected for the portfolio are then equally weighted, ensuring that each stock has the same impact on performance, for better or worse. This is a very simple approach for an ETF.
That said, you can’t just settle for the starting stock pool without really thinking about what it means to be in the starting stock pool. S&P 500 Index. The companies are included in the index because they are large U.S.-based companies that, as a group, provide a fair representation of the economy.
This process ensures that companies are reasonably large. And that means the selection pool for this ETF is pretty good. But there are still some not-so-minor issues when the only selection consideration is dividend yield.
What does the S&P 500 High Dividend ETF have?
When companies are ranked in the S&P 500, it does not mean that they will always be large, important, and representative of the economy as a whole.
The trading fortunes of companies rise and fall over time, which is why those in the S&P 500 Index are updated regularly. Companies that are no longer up to par are removed and new, more appropriate ones are added.
Often, companies are delisted after a long period of time in which they underperformed for whatever reason. These companies often have high returns because investors tend to avoid underperforming companies.
For example, Altria Group is part of the SPDR Portfolio S&P 500 High Dividend ETF due to its whopping 8.4% dividend yield. But continued decline in Altria’s cigarette business have left the stock nearly 40% below its 2017 high point. This has held back this ETF’s performance for years, and it’s not the only stock in the ETF that is lagging.
You could argue convincingly that the SPDR Portfolio S&P 500 High Dividend ETF’s approach gives it a sort of value or curved against the flow. But investors looking for income might not want to take on the risks associated with contrarian or value investing.
There are other dividend-focused funds, such as Schwab US Dividend Stock ETF (SCHD -0.24%), which specifically attempt to find high quality dividend stocks. To do this, you have to give up some yield, with the Schwab ETF’s yield being 3.4%, but for conservative investors this trade-off might be worth it.
Then there is the question of sectoral allocations. Certain sectors of the market tend to have higher returns than others. A good historical comparison would be between utility And technology sectors. THE SPDR Fund for Selected Utilities Sector (XLU -1.09%), which is simply the utility stocks in the S&P 500 Index, has a yield of about 3%. THE Selected Technology Sector SPDR Funds (XLK 0.23%) has a yield of 0.7%. Needless to say, this has a significant impact on the portfolio of the SPDR Portfolio S&P 500 High Dividend ETF.
The most important sector of the SPDR Portfolio S&P 500 High Dividend ETF is real estate at around 26% of assets, followed by financials at 20% and utilities at 18%. In total, these three sectors alone represent almost two-thirds of the ETF’s assets. Although it owns 80 stocks, it lacks diversification in other areas.
For reference, technology makes up less than 2% of the fund, even though it is the largest sector in the S&P 500, with about 31% of that index’s assets. In other words, the SPDR Portfolio S&P 500 High Dividend ETF is not representative of the economy as a whole.
It’s not a bad ETF as long as you know what you’re buying
The SPDR Portfolio S&P 500 High Dividend ETF is clearly a high-yielding ETF and its methodology is quite easy to understand. This might be a good option for many dividend investors, but probably not all.
And the key factors here all point back to simplistic selection criteria that can leave the exchange traded fund holding out-of-favour stocks, with a high percentage of assets in a very small number of sectors. If you’re looking for passive income, you might consider the SPDR Portfolio S&P 500 High Dividend ETF, but make sure you understand the downsides here before purchasing.