Published Sat, 21 Mar 2020 14:07:48 -0400 on Seeking Alpha
SDY invests in U.S. dividend stocks that have increased their dividends for more than 20 consecutive years.
Although there is no screening for stocks with high payout ratio, the fund has limited concentration risk.
Stocks in SDY’s portfolio appear to be undervalued against their historical averages.
The SPDR S&P Dividend ETF (SDY), which seeks to track the S&P High Yield Dividend Aristocrats Index, focuses on U.S. stocks that have over 20 consecutive years of dividend growth. However, the selection criteria does not include any screening for a stock's payout ratio nor financial strength. Fortunately, SDY has limited concentration risk. SDY is currently undervalued. We think this is a good fund for investors seeking dividend growth.
Data by YCharts
SDY’s focus on dividend growth is beneficial
SDY seeks to track the investment results of the S&P High Yield Dividend Aristocrats Index. The index selects companies from the S&P 1500 Index that have at least 20 consecutive years of dividend growth. We like this approach because stocks that are able to increase their dividends for more than 20 consecutive years are likely stocks that are able to consistently grow their businesses in different phases of the economic cycle. In other words, they have at least been through several economic recessions and know how to handle a crisis without cutting their dividends.
However, its construction method is based on past information
Although these are companies that are able to grow their dividends for over 20 consecutive years, past performance does not equate to future dividend growth. SDY’s portfolio selection methodology does not do any additional screening. For example, there is no screening on a stock's balance sheet nor its dividend payout ratio. Therefore, stocks in SDY's portfolio are still susceptible to a dividend cut if they already have a high payout ratio and a deteriorating balance sheet.
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