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Amid the seemingly never-ending spate of artificial intelligence (AI) hoopla – one encompassing a slew of stocks that either aren’t dividend payers or those sporting paltry yields – it’s not surprising that some investors are taking their eyes off the dividend ball.
Throw in the fact that for the five years ending 2025, S&P 500 member firms spent more on share repurchases than they did on dividends and some market participants may be getting the vibe that dividends are fading from the limelight.
On the other hand, dividends remain important contributors to long-term total returns and at a time when broad market indexes are moving in excess of 1% on a seemingly daily basis, some, perhaps many clients will appreciate the stability and volatility-reducing power of dividends.
To the point, clients may well appreciate the advantages offered by dividend growth stocks. Fortunately, advisors don’t have to stock-pick to that effect because ETFs such as the State Street SPDR® S&P® Dividend ETF (SDY) provide exposure to broad baskets of companies with notable track records of payout increases.
Sizing Up SDY
Advisors are likely somewhat familiar with SDY as the $20.9 billion ETF has been on the market for 21 years. It tracks the S&P High Yield Dividend Aristocrats Index, which is a collection of stocks that have increased payouts for at least 20 consecutive years. However, the fund’s components, on average, far exceed that requirement.
“The average yearly increase for the more than 155 firms in the fund is 34 years and nine constituents have over 60 consecutive years of dividend increases,” notes State Street Investment Management. “These are companies that started raising their dividends when John F. Kennedy was president and before the Beatles arrived in the US.”
Not surprisingly, the 20-year increase streak requirement turns up a lineup that materially differs from that of say an S&P 500 ETF. For example, SDY allocates approximately half its weight to industrial, consumer staples and utilities stocks. That’s not glamorous, but may be just what the doctor ordered for income-hungry clients and those looking to augment tech-heavy portfolios. The ETF may also be appealing to clients and investors that are looking to avoid the concentration risk permeating so many popular cap-weighted broad market funds.
“SDY is also less top heavy than the broad market; its top 10 stocks comprise just 17.6% of the total exposure compared to 37.3% for the S&P 500 Index and 32% for the broader S&P 1500 Composite Index,” adds State Street. “And the max weight of a firm within SDY is just 2.5% compared to almost 8% for the broad market—another indication of lower stock specific risk.”
SDY Has Inflation-Fighting Chops
Another reason dividend growth strategies merit attention today is inflation. Save for unusually high eras of consumer price increases, such as 2022, payout growth has often outpaced inflation. Specific to SDY, its underlying index historically sports a yield premium over the broader market, indicating it has some inflation-fighting credibility.
(Image: State Street)
“But SDY’s index, given its focus on reliable dividend payers, has a trailing 12-month dividend yield of 2.86%,” concludes the issuer. “That rate is above the market’s historical payout and measures of inflation—indicating the potential for both enhanced nominal equity income and enhanced real equity income.”
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