Published Fri, 20 Mar 2020 13:17:33 -0400 on Seeking Alpha
SPYD invests in high dividend stocks in the S&P 500 Index.
The fund’s selection methodology does not consider these stocks’ payout ratios and therefore SPYD is much more susceptible to dividend cuts in an economic downturn.
SPYD also has a high exposure to cyclical sectors.
Stocks in SPYD’s portfolio still appears fairly valued despite the recent market selloff.
SPDR Portfolio S&P 500 High Dividend ETF (SPYD) focuses on high dividend stocks in the S&P 500 Index. The fund seeks to track the S&P 500 High Dividend Index. The fund basically selects 80 highest yielding dividend stocks in the S&P 500 Index. This approach may not be advantageous because the selection criteria does not consider these stocks' payout ratios as well as forward looking information. SPYD also has a high exposure to cyclical sectors, which makes it much more vulnerable in an economic downturn. Therefore, we think investors may want to wait on the sidelines until a better buying opportunity.
Data by YCharts
SPYD’s selection method only focuses on trailing 12-month yields
SPYD constructs its portfolio by selecting 80 highest yielding stocks in the S&P 500 Index. The fund ranks the stocks in the S&P 500 Index based on their trailing 12-month dividend yields. Dividend yield of a stock is calculated based on its trailing 12-month dividend (excluding special dividend) divided by the current share price at the time of rebalancing. There are several things that we do not like about SPYD’s portfolio construction. First, the company does not look at these companies’ payout ratios. As we know, high-yield stocks are often stocks that pays a large portion of its earnings to shareholders as dividends. Hence, their payout ratios are generally high and any headwinds can result in higher payout ratios. Second, the portfolio construction methodology does not look at the strength of the balance sheet. As can be seen from... Read more