SPYD: May Outperform with Yield and Total Return (NYSEARCA:SPYD)

While there are many dividend-focused ETFs, standard stock funds yielding between 4-6% are few and far between. One of the best of these seems to be SPDR® Portfolio S&P 500® High Dividend ETF (NYSEARCA: SPYD) with a forward yield of 4.07%. However, as this article will highlight, its composition is too simple to distinguish it, and there are better funds in this space.

Introducing SPYD

SPYD is a passively managed fund launched in 2015. According to the fund’s page,

The S&P 500 High Dividend Index is designed to measure the performance of the top 80 high dividend yield companies within the S&P 500^® Index, based on dividend yield.

Clearly, the selection process is not very complex. According to the prospectus, the only real filter is that a company must have “market capitalizations not adjusted by at at least $14.5 billion and float-adjusted market capitalizations of at least $7.25 billion at the time of inclusion.” The fund then selects the remaining 80 stocks with the highest dividends and weights them equally. The portfolio is rebalanced semiannually, in January and July.

As expected, the fund holds a lot of REIT, utility and financial stocks.

It differs greatly from one of SPYD’s partners, the Invesco High Yield Equity Dividend Achievers™ (PEY) ETF, which excludes REITs. If you want to avoid this sector or have enough REIT exposure as it is, perhaps PEY is a better option and I wrote about it here recently.

One of the disappointing aspects of the selection and weighting process is that there is no scanning for quality. Outdated stocks such as Walgreens Boots Alliance (WBA) have high dividends due to falling prices and are therefore included equally.

There are several ways around this. For example, PEY filters quality by including only stocks that have “experienced an annual increase in regular dividend payments for at least the last ten consecutive calendar or fiscal years.” This simple rule eliminates some of the underperforming stocks.

At the other end of the spectrum, SPYD’s lowest-yielding stocks, such as Kellanova ( K ), with a FWD return of just 2.83%, may have done well this year, but weigh on the fund’s overall performance . Indeed, there are only 44 stocks in the S&P500 (SPY) with a return of over 4% and SPYD owns 80 stocks. In other words, the fund is forced to buy and equally weight stocks with yields below 4%. Holding fewer shares would be one way to increase the dividend yield, although this would obviously be at the expense of diversification.

SPYD Dividends and Peers

SPYD has a FWD dividend yield of 4.07% and a 30-day SEC yield of 4.25%. This is attractive when coupled with a very low expense ratio of 0.07%. As mentioned in the introduction, SPYD has few peers and a scan of US-focused equity dividend funds with a dividend yield of 4-6% and an expense ratio of less than 0.5% produces only two results.

If the net is widened by introducing higher spending rates, there are more results.

However, we can overlook QDPL because it uses a complex strategy involving derivatives. This leaves only the lower-yielding DEW and the higher-yielding PEY as additions.

PEY has already been mentioned and is a good income fund as it has a high yield of over 5% and pays monthly. However, SPYD provides much better total returns, which is especially evident recently.

I know what fund I would have held in the last year. Over a longer time frame, performance narrows but is still superior.

That said, neither SPYD nor PEY can compare to the returns offered by First Trust Morningstar Dividend Leaders Index Fund ETF (FDL).

FDL leads in most time frames and the last year is the only time SPYD leads. Over the long term, the returns really do add up.

FDL has no holdings in REITs and is relatively concentrated, with 55% of the portfolio in the top 10 stocks. This concentration leads to better yields and FDL still offers a similar dividend yield to SPYD. Indeed, the 2016 statistics show that the FDL wins on most parameters.

More reward for less risk makes FDL a more desirable fund.

ConCluSIonS

SPYD is part of a small group of dividend-focused ETFs that offer yields above 4%. Unfortunately, its simple selection process and equal weighting system don’t produce anything particularly attractive. PEY is better for income while FDL gives better total income. SPYD may be the better option if you specifically want exposure to REITs, as neither PEY nor FDL have any exposure to that sector.