Published Wed, 05 Jun 2019 14:15:40 -0400 on Seeking Alpha
The SPDR S&P Dividend ETF (SDY) provides income, quality and value: while these features make the fund a great source of cash flow and stability, they also bring the disadvantages of investing in high-yielding securities and using criteria other than market capitalization, i.e. that a risky security may occupy a large position in the portfolio and may be sold at the wrong time. For these reasons, this ETF should be held as a small holding in a portfolio, ancillary to a broader index fund, and not as a core constituent.
The Rational Behind The S&P High Yield Dividend Aristocrats Index
SDY tracks the performance of the S&P High Yield Dividend Aristocrats Index (Source: Morningstar), which includes only companies that are part of the S&P 1500 and that have raised their dividend for at least 20 consecutive years (the lower threshold makes the fund more diversified than the S&P 500 Dividend Aristocrats Index); however, companies are indexed based on their dividend yield rather than market capitalization, with the highest yielding stocks being the largest holdings (though capped at 4%). The main assumption of this ETF is that, if a company with a long history of growing dividends becomes a high-yield dividend stock, it is also undervalued. This has two positive consequences:
Firstly, the fund has a slightly higher dividend yield than the S&P 500 (2.4% vs 2% based on 2018 dividend); combined with the quality of its portfolio, this... Read more