The SPDR S&P Dividend ETF (SDY) may sound self-explanatory at first. Without digging any deeper, one might think it was just State Street’s version of a high yield dividend ETF that so many of the fund providers offer. However, when the index is taken into consideration, you begin to realize that this fund is more nuanced than the name suggests it to be.
The index for SDY is the S&P High Yield Dividend Aristocrats Index. “Aristocrats” is truly the right word to use when describing this index because the threshold for inclusion is very strict and only the highest class (so to speak) of stocks makes it through the final screens. On top of the usual liquidity and market cap screens employed by most ETFs, the Aristocrats Index requires constituents to have increased their dividends every year for 20 consecutive years.
20 years in a row of increased dividends is not an easy criterion to meet. Not only does this exclude companies which haven’t issued regular dividends over that 20 year span. (This includes Apple, which started issuing regular dividends again in 2012 after hardly issuing any at all since 1995. That’s right; Apple is not included in SDY even though when thinking of companies that could be considered an “aristocrat” Apple might be the first to come to mind. But in regards to SDY, Apple is not considered a “dividend aristocrat.”) It also excludes any company that has cut or has not maintained its dividend over the last 20 years. There are no exceptions; if a constituent is to remain in the index it must maintain this consistent dividend growth. These strict criteria for inclusion create a product that yields less than other dividend ETFs in the marketplace, but presents an offering that can say it owns the best of the best blue chip stocks.
Another thing to mention when talking about SDY and the S&P High Yield Dividend Aristocrats Index is that you should always be sure to know what an ETF’s underlying index is. Taking an ETF just by its name is not always as straightforward as it should be. Perhaps adding “aristocrats” to the name of SDY would be a good idea and help clarify the real goal of the fund. Alas, this isn’t always the case, but it’s a good thing each and every ETF’s prospectus is available online to make researching these issues a simple task.
As for our utilization of SDY, we put it to use in iSectors’ Domestic Equity Allocation as well as in our Global Equity Allocation. Both models have a dividend tilt (70-75% dividend/value, 25-30% growth) that utilizes SDY as a dividend appreciation complement to higher yielding dividend ETFs such as the WisdomTree LargeCap Dividend ETF (DLN). The tilt towards dividend funds reflects the research that over the long-term, value stocks will outperform growth stocks. Through 2014 and 2015 the tilt held the models’ results back moderately, but so far in the early portion of 2016 it has proved very beneficial.