Dividend investing has never been more popular. And that’s probably why it’s never been so misunderstood. Investors flock to stocks looking for yield, but they make a very dangerous assumption: that the stock price will rise over time.
Most stocks significantly underperform bonds and carry stock market risk. And in a market focused on trading artificial intelligence (AI) and not much else, that makes the SPDR Portfolio S&P 500 High Dividend ETF (SPYD) a better research tool for individual stocks than a solid exchange-traded fund (ETF) buy. At least for now.
SPYD was built on a simple concept. Identifies the 80 top-performing stocks in the S&P 500 Index ($SPX) and weights them equally. This has the effect that the fund needs to have a pool of winners as it cannot rely on a large pool of holdings.
That hasn’t happened often in this growth-driven market. The unique mechanics of this fund create a stark divide between the bull and bear cases for dividend investing in the current environment.
SPYD has been on a roll lately, as part of the trade increasingly away from tech stocks. The graph looks pretty good here. But frankly, this is not an ideal ETF to chart. It’s too diverse.
But with a price-to-earnings (P/E) ratio of 14x, this implies that there are good opportunities for a single stock from time to time. This may not be one of those times, until sectors or stocks show bursts of prices higher than the trading period.
The bullish case for SPYD centers on its role as a high-income diversifier in a market where growth stock valuations have historically become overblown. The fund currently offers a 12-month dividend yield of more than 4%. That’s nearly four times the return of the overall S&P 500.
Additionally, SPYD is heavily weighted toward defensive and value-oriented sectors, with real estate, financials, and consumer staples accounting for more than half of assets. In a year when persistent inflation and geopolitical tensions are fueling market dispersion, these sectors often act as safe harbors, providing durable cash flows and lower volatility than the technology-dominated leaders of the last decade.
