Investors looking for a broad range of companies with lengthy histories of boosting dividends can access those rising payouts via exchange traded funds, including the SPDR S&P Dividend ETF (NYSEArca: SDY) and the ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL).
Both ETFs track dividend aristocrats indexes. Dividend aristocrats are those S&P 500 members that have increased dividends for at least 25 consecutive years. The S&P High Yield Dividend Aristocrats Index, the benchmark for the SPDR S&P Dividend ETF, is home 103 S&P 1500 stocks that have dividend increase streaks of at least 20 years.
“While you can debate what the best number of years (for a dividend increase streak) might be, the logic is the same: A stock that has proven its ability to maintain and raise its dividend over a long period of booms and busts is a high quality company that is likely to survive whatever comes its way, said Charles Sizemore, a Dallas-based money manager in an interview with ETF Trends. “And today, that logic is particularly insightful in the long aftermath of the 2008 meltdown. The way I look at it, any company that continued to raise its dividend in 2008 and 2009 is a company that can survive and prosper through Armageddon.” [Getting Consistent Dividend Growth]
Although it is advertised as a high yield fund, the SPDR S&P Dividend ETF is not excessively allocated to some of the sectors that are well-known for large dividend yields. The fund’s combined allocation to utilities and telecommunications stocks is 15.6%, according to issuer data. SDY’s trailing 12-month dividend yield is almost 2.3%.
Low allocations to those sectors, which are sensitive to fluctuations in interest rates, can help the SPDR S&P Dividend ETF remain durable when rates do rise. Additionally, the fund has a 24.6% weight to financial services names and a 14.4% weight to industrials. Those are two of the stronger sectors in rising rate environments. [Retirees May Need More Stock ETFs to Meet Income Needs]
The SPDR S&P Dividend ETF also features a 14.2% weight to consumer staples stocks. Combine that with its utilities exposure, and a quarter of the ETF’s weight is allocated to defensive sectors. Some defensive sectors, including staples and utilities, command high valuations. SDY reflects as much with a price-to-earnings ratio of 19.65, which is slightly above the P/E of 19.31 on the S&P 500.
“Another particularly important issue today is the specter of rising interest rates. Yields across the yield curve are low, and I expect them to stay that way for a while,” adds Sizemore.” But when they do eventually rise, anything with a fixed or slow-growing payout is going to get slammed. A stock growing its dividend at a fast clip is much more likely to outperform a higher-yielding but slower-growing payer during an environment of rising yields.” [Some Dividend ETFs Lag in Q1]
SDY’s rival, the ProShares S&P 500 Aristocrats ETF, is even more selective about its holdings. The ProShares ETF tracks the S&P Dividend Aristocrats Index, which requires constituent firms to have dividend increase streaks of at least 25 years.