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This Dividend ETF Gets A Makeover (SDY, SDIV, T, TROW, CL, SYY)

December 9th, 2011

Michael Johnston: One of the most exclusive clubs on Wall Street now has a few more members, with the new additions resulting in some minor changes to a popular dividend-focused ETF. S&P recently added a total of ten companies to its S&P 500 Dividend Aristocrat Index, headlined by telecom giant AT&T (NYSE:T) and also including companies such a T. Rowe Price (NASDAQ:TROW), Colgate-Palmolive (NYSE:CL), and Sysco Corp. (NYSE:SYY)Inclusion in the Aristocrats index requires a long history of steady dividend hikes; the benchmark is comprised of companies that have increased their cash distribution for at least 25 consecutive years. That means that companies must have both a long operating history and the record of consistently increasing payouts to shareholders–which can be challenging throughout a full market cycle [see Special Report: Dividend ETFs In Focus ].

There are currently no U.S.-listed ETFs linked to the S&P 500 Dividend Aristocrat Index though the SPDR S&P Dividend ETF (NYSEARCA:SDY) seeks to replicate the S&P High Yield Dividend Aristocrats Index, which is also impacted by the change. That benchmark is slightly more broad, in that it draws from the S&P 1500 to find eligible securities–in other words, it can include small and mid cap firms in addition to more popular large cap securities.


New Dividend Aristocrats
AT&T T
HCP Inc HCP
Sysco SYY
Nucor NUE
Illinois Tool Works ITW
Genuine Parts Co. GPC
Medtronic MDT
Colgate-Palmolive CL
T. Rowe Price Group TROW
Franklin Resources BEN

Though the index rebalance does not take place until after the close of trading on December 16, SDY has already added many of the new names to its portfolio. The stocks being added to the index mid-month already account for about 10% of SDY’s portfolio, led by AT&T at about 3.4%. T is the second largest component of the ETF currently, behind only Pitney Bowes. From the universe of companies that meet the eligibility criteria, the top 60 yielding stocks are included in the benchmark [see Free ETF Stock Exposure Tool].

HCP, GPC, and CL had previously been included in the S&P High Yield Dividend Aristocrats Index.

Inside SDY

There are now close to 50 ETFs focusing on dividend-paying stocks, including products targeting both domestic and international markets. With almost $8 billion in assets, SDY is one of the largest dividend ETFs on the market. The underlying index offers a meaningful upgrade in current return from broad U.S. stock benchmarks such as the S&P 500; SDY’s benchmark currently offers a dividend yield of about 3.65% and a P/E ratio of just under 16x [see SDY Holdings].

Still, the yield on SDY is considerably lower than the current returns that can be derived from some other dividend-focused products. Because inclusion in SDY’s underlying index requires a long history of stable dividends, this product generally tilts exposure towards established companies that consistently make dividend payments [see Dividend ETF Investing: Four Critical Factors To Consider]. In other words, the primary hurdle that must be cleared relates to consistency of dividends, as opposed to the magnitude of the payouts (though yield is considered in selecting from the eligible companies). Global X’s SuperDividend ETF (NYSEARCA:SDIV), for example, maintains a dividend yield in the neighborhood of 5.3% [see A Tale Of Two Dividend ETFs].

S&P announced that CenturyLink will be removed from the benchmark. CTL is no longer a holding of SDY.

Written By Michael Johnston From ETF Database Disclosure: No positions at time of writing.

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NYSE:SDIV, NYSE:SDY


 

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