SPYD: focuses on the dividend yield factor (NYSEARCA: SPYD)

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Recently, I’ve been constantly concerned about the volatile market environment and looking for ways to protect my portfolio. This is why I continue to use funds and investments with high distribution yields: a bird in the hand is better than two in the Bush.

The fund I am reviewing in this article is the SPDR Portfolio S&P 500 High Dividend ETF (NYSEARCA: SPYD). I will also compare it to my current yield champion, the Schwab US Dividend Equity ETF (SCHD).

SPYD has a high current yield of 3.9% and has outperformed year-to-date. However, in my opinion, I still prefer SCHD as an income choice because SCHD’s investment strategy weighs financial strength with dividend yield and dividend growth. SPYD has large sector weightings in cyclical financials and energy companies that can lead to a sharp decline if the economy goes into a recession.

Fund Facts

The SPDR Portfolio S&P 500 High Dividend ETF is a $7.8 billion ETF that aims to provide high dividend income and the opportunity for capital appreciation.

Strategy

SPYD’s strategy is to provide investment returns comparable to those of the S&P 500 High Dividend Index (“Index”). The index measures the performance of 80 high dividend yielding companies within the S&P 500. Dividend yield is defined as the latest annualized base dividend yield, which excludes special dividends. The index is equally weighted and rebalanced every six months. As of July 31, the index had only 77 constituents.

Portfolio holdings

Because the fund and its corresponding index invest in the highest-earning companies in the S&P 500, it is more heavily weighted toward defensive sectors such as utilities and REITs, as well as financials and energy companies (Figure 1). For example, the fund and index have a 21.4% weighting in financials, roughly double the 10.6% weighting in the S&P 500. Utilities has a 16.3% weighting versus 3.0% in the S&P 500. Real estate has a weighting of 14.6%. versus 2.9% and energy has a weighting of 9.2% versus 4.3%.

SPYD Award

Figure 1 – SPYD sector breakdown (SSGA)

Return

In general, the fund has delivered strong long-term returns, with 3- and 5-year returns of 8.1% of NAV as of July 31 (Figure 2). However, this is significantly lower than the S&P 500 returns of 13.4% and 12.8% respectively for the same period. It should also be noted that year-to-date, the SPYD ETF managed to generate positive returns of 0.9% compared to the S&P 500 return of -12.6%.

SPYD performance

Figure 2 – SPYD performance (SSGA)

Comparing SPYD’s performance to its peer group, Large Cap Value funds as defined by Morningstar, we find that SPYD’s performance has been volatile. In its short history, SPYD is either the top quartile or the bottom quartile (Figure 3).

SPYD against its peers

Figure 3 – SPYD vs its peers (morning star)

It also exhibits higher volatility and lower returns than its index and category, both over 3 and 5 years (Figure 4).

SPYD Volatility

Figure 4 – Volatility and returns of SPYD compared to its peers (morning star)

Distribution and yield

SPYD is a high-yield fund, with a 30-day SEC yield of 4.35% and an LTM distribution yield of 3.9% (Figure 5). That’s more than double the S&P 500’s 1.7% payout yield.

SPYD Distribution Yield

Figure 5 – Performance of the SPYD distribution (SSGA)

SPYD’s distribution is variable and paid quarterly. Its most recent distribution was $0.405/share, paid on June 23, 2022. There is no discernible trend in SPYD’s distribution, as it has fluctuated from year to year and is dependent on dividends from underlying securities.

SPYD Distribution History

Figure 6 – SPYD distribution history (Seeking Alpha)

Costs

SPYD is a low cost fund, with a gross spend rate of 0.07%. While returns are variable, fees are not. Selecting low-cost funds, all else being equal, will lead to higher returns over the long term.

SPYD fees

Figure 7 – SPYD Fees (SSGA)

SPYD versus SCHD

Readers are encouraged to read my detailed article on the merits of the Schwab US Dividend Equity ETF before the following comparison between the SPYD ETF and the SCHD ETF.

First, using Portfolio Visualizer to compare the two funds, we note that SCHD has a much higher annualized CAGR return of 12.9% compared to SPYD of 8.9% for the period analyzed (November 2015 to August 2022).

SPYD versus SCHD

Figure 8 – SPYD vs SCHD (Author created using Portfolio Visualizer)

Comparing risk metrics, SCHD also comes out on top, as it has a lower Stdev (14.8% vs. 18.4%), lower maximum drawdowns (21.5% vs. 36.6%), and a higher (0.83 versus 0.51).

Where SPYD comes out on top is in 2022 when it comes back year-to-date, where SPYD is down -1.8% compared to -8.9% for SCHD (Figure 9). The reason for SPYD’s better year-to-date performance is its larger allocation to defensive sectors, as well as energy companies.

SPYD versus SCHD

Figure 9 – SPYD vs SCHD annual returns (Author created with Portfolio Visualizer)

Then, comparing the distribution efficiency, SPYD has a higher LTM distribution efficiency of 3.9% compared to 3.2% for SCHD. However, it should be noted that SPYD’s distribution is volatile (may be up or down year over year), whereas SCHD has consistently increased its distribution to over 10% CAGR since its inception. creation (Figure 10).

SCHD Distribution History

Figure 10 – SCHD distribution history (Seeking Alpha)

In terms of fees, the two funds are comparable, with SPYD charging a gross expense ratio of 0.07% and SCHD having an expense ratio of 0.06%.

Finally, let’s compare the strategy between the two funds. SPYD’s strategy, as I understand it, simply looks at the highest dividend yielding companies in the S&P 500 as of the index date and selects the top 80. The strategy does not take into account the financial strength of the company, nor the historical trend of the dividend. The strategy can skew the fund towards defensive sectors and cyclical value sectors such as financials and energy companies.

In contrast, the SCHD strategy selects companies based on cash flow to debt, return on equity, dividend yield and 5-year dividend growth rate. This selection tends to focus the fund on companies that have demonstrated financial strength, strong returns and a desire to increase dividends over time.

Although SPYD has outperformed SCHD so far in 2022, I think SCHD has the better mousetrap as evidenced by its higher historical returns and better risk metrics. In addition, SCHD’s strategy has grown distributions at a high rate while pursuing financial strength, while SPYD’s strategy only considers the dividend yield factor, which may come and go in favor, resulting in volatile returns and distributions.

Conclusion

In summary, while I like SPYD’s high current yield and YTD’s performance, I still prefer SCHD as an income choice because I think SCHD has a better overall investment strategy design that weighs financial strength with yield of the dividend. My biggest fear for the SPYD is that it has significant weights in the cyclical financial and energy sectors that could lead to steep declines if the economy really goes into recession.

About Tina G.

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