The SPDR Portfolio S&P 500 High Dividend ETF is an easy way to boost your dividend income. As I'll lay out, this ultra-low-cost fund gives you instant access to a diverse group of high-dividend paying companies in the S&P 500.
ETF Profile
SPYD passively tracks the S&P 500 High Dividend Index. The index itself holds the top 80 highest yielding companies contained with the S&P 500. Those holdings are equal-weighted at the time of rebalancing. It's a nice feature to not tilt to the largest mega-caps that might make a list because of dividend yield. By sticking to the S&P 500 universe, the companies themselves are all at least $4B in size and have ample liquidity. When the portfolio is rebalanced, each holding has a 1.25% allocation.
There's a 20% buffer at each rebalancing that will attempt to keep current holdings in the index. After the S&P 500 is sorted by dividend yield, 64 of the top 80 holdings are automatically included. Current holdings will remain as long as they are in the top 96 of highest-dividend yielding companies. After that, the highest-ranked non-holdings will then be included until 80 holdings are met. The rules are designed to limit some portfolio turnover, if possible, by trying to keep existing holdings even if their yield has dropped (perhaps due to a runup in share price). One final failsafe and S&P can exclude a company at rebalancing if it deems the yield to be unsustainable. The index is rebalanced semi-annually, at the end of January and July.
There is also a monthly dividend review that S&P performs. If a holding cuts, suspends, or skips a dividend payment, and the new yield wouldn't qualify at the time of rebalancing, it'll be removed and not replaced. This seems to follow many dividend investors' gameplans of selling companies that cut their dividends.
The ETF sports a low expense ratio of 7 basis points ($7 per $10,000 in the fund). It's essentially a free way to get a shot of dividends in the arm.
Holdings
Here is the current list of holdings taken from Seeking Alpha's holdings page at the writing time. We are closer to the next rebalancing than the one in July.
Right now, Invesco sits atop the holding board. They have an interesting story in 2020, as many companies do. They cut their dividend in April by 50%, which still had their forward yield at the time at 8.4%. When the index was rebalanced at the end of July, Invesco still had a hefty 6.2% yield, and it remained in the index.
Fast forward to the time of writing, and shares have jumped 70% since July. This is why their weighting has risen to 1.73% (from 1.25%) of the portfolio.
Scanning further down the top holdings has been a mixed bag of holdings this year, but a set of good performers since the end of July. Simon Property Group and Ventas both cut their dividends earlier this year. Their newer dividend yields were still high enough to remain in the index. That has paid off as both companies have performed well over the past few months as some of the headwinds and uncertainty around COVID abates.
The portfolio currently has a large tilt between financials and real estate, again, for good reasons. COVID crushed REITs as various lockdowns and socially distant measures profoundly impacted in-person physical shopping. Traditional financials have also been hurt as interest rates have been cut to zero. What I don't have, though, is a historical snapshot of the sector holdings over time. Here's a direct link to an Excel sheet with all the holdings.
Dividend History
SPYD pays a variable quarterly dividend rate. It is hard to drive any meaningful conclusions from a single payment. Here's the SA page covering the historical dividends.
It makes more sense looking at full-year totals to get a clearer picture.
Year Total Growth 2016 1.5139 - 2017 1.7354 14.63% 2018 1.619 -6.71% 2019 1.7463 7.86%
YTD, $1.0255 per share has been distributed, which is on pace to be below the total received over the past two years. It should be understood this is related to COVID and dividend payments being slashed for many companies. Again, not knowing the amount that will be declared, the total for the year may come under even the total in 2016, so be aware of that.
Performance
From the State Street website, here are the performance metrics. The fund is down about 15% for the year, though it's up 17% in just the past quarter.
The high-dividend space took a hard hit during the March meltdown. Cherry-picking dates from February 21st to March 23rd, I calculated SPYD dropped 46% versus 33% for the S&P.
Before COVID, this was a strong performing ETF that offered more than twice the overall market yield. In 2019, it returned 22%, which lagged the 31% of the S&P, if you use that as the benchmark. The indicated yield has finally settled back down to the upper 4% range, again, as the market feels there is some more certainty about seeing the end of the COVID tunnel.
Even with the 17% jump in the past quarter, shares are still about 18% under their old all-time high. I won't suggest it will reach that point necessarily soon, but I expect some of that gap to close. Investors and retirees are still struggling to find much yield in this environment.
performance
Competitors
In the space of broad, high-yielding US equities, I see Invesco S&P 500 High Dividend Low Volatility Portfolio ETF (SPHD) and Invesco High Yielding Equity Dividend Achievers ETF (PEY) being the two closest competitors to SPYD. I made a quick table covering the three.
Ticker Yield Holdings Expense Ratio Pays (NYSEARCA:SPYD) 4.59% 80 0.07% Quarterly (SPHD) 4.89% 50 0.30% Monthly (PEY) 4.34% 50 0.52% Monthly
Looking at the total return data for 2019, PEY was the top performer with a 24.76% total return. SPYD was second at 21% and SPHD at 20%.
This year is interesting in the academic sense of seeing how different ETF strategies functioned. For years I've heard about the merits of strategies such as low volatility. Now, perhaps in a "normal" market, it operates as expected, but earlier this year, it offered zero ballast during a rapidly falling market. SPHD (the blue line) still dropped about 41%. Just be aware that a fund's stated objective may cease to function correctly during extreme market turbulence. To be fair to SPHD, asset classes across the board including bonds and preferred also fell so there was no safe haven in March.
Now stepping back and looking at 2020 as a whole, PEY continues to be the best performer (though all the funds are still down for the year), and SPYD is the laggard, still being down 13% for the year. What I've also learned from this analysis is PEY is worthy of its own dedicated research piece.
Risks
2020 seems to have been the perfect foundation for testing what risks funds face. During extreme market turmoil, this fund may very well fall substantially. Now that it's happened before, it could happen again. What is not clear is whether that will occur with COVID again. It should come as no surprise that the performance skyrocketed since the announcement of the vaccine. Of the three ETFs compared, SPYD has performed the best since November 6th.
It would appear the market is increasingly pricing in COVID being solved based on the recent pricing action. We still need to get through the cold winter months and vaccinate a vast swath of the population, which will last throughout 2021. So the immediate risks could be from returning to lockdowns or other new developments in the COVID story.
Why Now
I think SPYD is still a compelling investment idea right now for a few reasons. It fell further than its closest competitors in March and remains down for the year more than them. I expect some of this gap to close up over the next few months, which can help drive total returns. In the meantime, you can enjoy a 4.5%+ distribution yield across a blended portfolio of 80 equally-weighted holdings. Diverse holdings, solid distribution yield, and upside potential can be obtained for the rock bottom price of 7 basis points.
Based on past data, the ex-dividend is probably going to be this Friday, December 18th. If you own shares or are interested in buying new shares, you can do it before the market closes on Thursday, December 17th, and receive the dividend. The amount has not been disclosed yet as of this writing. Note, there may be tax consequences if you do this in a taxable account. Also, be mindful that the total amount of dividends paid out will most likely be lower than in the past several years due to COVID. These forces will ease as COVID is in the rear-view.
Please consider following me as I cover the dividend space on Seeking Alpha if you enjoyed this article.
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