This fund targets profitable firms with a 20-year history of raising dividend payments.

fundcoverage@morningstar.comSDY
SPDR S&P Dividend

SPDR S&P Dividend ETF SDY is a solid income strategy that targets companies that have consistently grown their dividends over the long term, which should reduce exposure to companies with weak fundamentals. This is a well-diversified and low-cost portfolio, though there are other cheaper dividend index funds available. This strategy earns a Morningstar Analyst Rating of Silver.

The fund fully replicates the S&P High Yield Dividend Aristocrats Index, which includes stocks from the S&P 1500 Index that have raised dividend payments for at least 20 consecutive years. The fund's focus on firms that are financially healthy enough to grow their payouts favors profitable companies with durable competitive advantages and shareholder-friendly management teams. It then weights these stocks by yield, which increases its value tilt and boosts income. Chasing yield can lead to risky stocks with weak fundamentals and high dividend payout rates, with a small buffer to protect their dividends should earnings fall. However, this fund’s dividend growth screen mitigates exposure to weak firms.

This broadly diversified portfolio holds about 112 stocks. The top 10 positions represent about 17% of assets, which effectively diversifies firm-specific risk. That said, there is some sector-specific risk here. It tends to have greater exposure to the consumer defensive sector and less exposure to financials stocks than the average fund in the large-value Morningstar Category.

State Street Global Advisors charges a fee of 0.35% for this fund. This cost advantage relative to actively managed peers has translated into strong category-relative performance over the long term. Over the trailing 10 years through August 2019, the fund has outperformed the Russell 1000 Value Index by 152 basis points annualized with slightly lower risk. Overall, this fund should continue to enjoy a durable long-term edge over many of its competitors thanks to its cost advantage compared with its peer  average and lower-than-average cash drag.



Portfolio Construction

This fund targets profitable U.S. stocks with a history of raising their dividend payments, which should help it deliver an attractive yield and hold up better than the market during downturns. It earns a Positive Process Pillar rating. The fund tracks the S&P High Yield Dividend Aristocrats Index, which includes companies from the S&P 1500 Index that have a 20-year history of increasing dividend payments. Companies must also meet float-adjusted market-cap and liquidity requirements to be included. The fund weights its holdings each quarter by the stock’s indicated dividend yield, subject to a 4% cap to better diversify risk. The fund does not impose sector weight caps, so this fund has persistent sector bets owing partially to its long dividend payment history lookback. The fund is typically overweight in the materials, utilities, and real estate sectors and underweight in the energy, healthcare, and information technology sectors compared with the category average.

Fees

State Street charges a 0.35% expense ratio for this fund. This fee is a fraction of the 0.85% median levy of the fund’s large-value peers. It earns a Positive Price Pillar rating. Over the trailing three years ended August 2019, this fund lagged its benchmark by 41 basis points per year, more than its average annual fee during this time.

S&P 500 index data: S&P 500 Copyright @ 2019

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