ETFs
Which S&P 500 dividend ETF is best?
The SPDR S&P Dividend ETF (NYSEARCA: SDY) is a popular choice among investors, as it has accumulated an impressive $20.2 billion in assets under management (AUM) since its launch in 2005. But SDY isn’t the only dividend-focused fund within the SPDR ETF series. It is joined by a more recent Dividend ETFthe SPDR Portfolio S&P 500 Dividend ETF (NYSEARCA: SPYD), which has accumulated $6.9 billion in assets under management since its launch in 2015.
The ETFs have slightly different strategies but are both focused on dividends. What is the best choice for investors in the future? Despite SDY’s popularity and longevity, the fund today appears to be a disappointing choice for investors. Its newer, smaller sister fund SPDR performs better on dividends and is significantly cheaper to own. Let’s take a closer look at these two SPDR dividend ETFs.
What is the strategy of the SDY ETF?
According to State Street, SDY invests in a stock index that “selects companies that have consistently increased their dividend for at least 20 consecutive years and weights stocks based on performance.”
State Street explains: “Due to the index’s selection over 20 years of consecutive dividend increases, stocks included in the index exhibit both capital growth and dividend income characteristics, as opposed to stocks that are pure yield. »
What is the strategy of the SPYD ETF?
Meanwhile, SPYD invests in a stock index “designed to measure the performance of the top 80 high-dividend companies within the S&P 500 Index.” Like SDY, SPYD also aims for a combination of capital appreciation and yield.
Performance Comparison
As of April 30, SDY generated a mediocre three-year annualized return of just 4.0%, while SPYD generated a slightly lower return of 3.7%. Over the past five years, SDY has produced an annualized return of 7.6%, which is better than SPYD’s five-year annualized return of 5.4%.
These returns aren’t great, and investors clearly didn’t lose money with either fund, but they underperformed the market as a whole. State Street’s SPDR S&P 500 ETF Trust (NYSEARCA: SPY), the largest and most liquid ETF in the market today and a good representation of the market as a whole, had a superior three-year annualized return of 7.9% and a much better annualized return of 13.0% on the same date.
Both ETFs underperformed the broader market and SDY slightly outperformed SPYD. However, SPYD currently appears to be a more attractive investment, as we will see in the following sections.
Dividend Yield – Where the Rubber Meets the Road
The dividend is clearly SDY’s calling card, but the fund does not yields 2.5%. Although this is a better return than the market as a whole (e.g. SPY only yields 1.3%), that’s not really an attractive yield for income investors, and SPYD easily beats it with a much higher yield 4.5% yield.
The story continues
In my opinion, this leaves SDY in a no-man’s land, as investors probably won’t choose either fund for its performance over the past few years, but income-oriented investors will find the return significantly higher of SPYD much more attractive.
Fees: another area of clear separation
The other area where SPYD really stands out and emerges as the superior choice to SDY is fees.
SPYD charges a very attractive expense ratio of just 0.07%, while SDY charges a significantly higher expense ratio of 0.35%. This means that an investor investing $10,000 in SPYD will only pay $7 in fees per year, while an investor in SDY will pay $35 in fees per year.
While SDY’s 0.35% expense ratio isn’t egregious as a whole, it is five times higher than SDY’s.
The difference between these fees can make a real difference over time. Assuming each fund returns 5% per year in the future and maintains its current expense ratio, the investor investing $10,000 in SPYD would pay only $90 in fees over a 10-year period, while the investor in SDY would pay $443.
Portfolio comparison
I will congratulate SDY for its diversification. The fund owns 136 stocks and its top 10 holdings represent just 19.3% of the fund, meaning SDY does a good job protecting investors from concentration risk. Below you will find an overview of SDY’s Top 10 Stocks using the TipRanks fund tool.
Meanwhile, SPYD owns fewer stocks but remains fairly diversified, with 77 holdings, and offers similarly low concentration. Its top 10 holdings represent just 15.2% of the fund. Below you will find an overview of SPYD Top 10 Stocks using the TipRanks fund tool.
As you can see from the list of top holdings, SDY largely features stocks from industries traditionally known for their dividend payments, such as utilities And basic consumer goods. The fund’s largest exposures are to these sectors, both of which have an 18.0% weighting.
Meanwhile, SPYD is also largely exposed to utilities (18.6%), but it is more heavily exposed to real estate and financial services, which have weights of 27.0% and 20.3% respectively within the funds.
While there are differences in exposure, the portfolios are similar in that they both focus on segments of the market known more for dividends than growth.
Meanwhile, TipRanks’ Smart Score system takes a more favorable view of SPYD’s top 10 stocks than SDY’s. THE Smart Score is a proprietary quantitative stock rating system created by TipRanks. It rates stocks from 1 to 10 based on eight key market factors. A score of 8 or higher equates to an Outperform rating.
The Smart Score gives six of the top 10 SPYD stocks Smart Scores equivalent to superior performance, while only four of the top SDY stocks receive these favorable ratings.
Is SDY Stock a Buy, According to Analysts?
As for Wall Street, SDY earns a Moderate Buy consensus rating based on 84 Buys, 45 Holds, and six Sell ratings assigned over the past three months. THE SDY stock average price target of $141.49 implies 9.2% upside potential from current levels.
Is SPYD Stock a Buy, According to Analysts?
Analysts have a very similar view on SPYD, which earns a Moderate Buy consensus rating based on 62 Buys, 13 Holds, and three Sell ratings assigned over the past three months. THE SPYD stock average price target of $44.34 implies 9.2% upside potential from current levels.
The bottom line: SPYD is the clear winner
Although SDY is the largest and most popular fund, it’s difficult to understand why this is the case beyond perhaps its past pedigree or investor inertia. SPYD clearly appears to be a superior pick over SDY due to its much higher dividend yield and significantly lower expense ratio, which is only one-fifth that of SDY.
Although both ETFs have underperformed the broader market in recent years, SPYD still appears to be an attractive choice for income-oriented investors due to its attractive yield and inexpensive fees, which is more than what I can say for SDY.