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When cash is king, dividend-paying companies have special appeal. Even in this shrinking economy, companies like Campbell Soup (NYSE: CPB ) are finding ways to increase payouts.
One ETF actively seeks out stocks with long records of paying dividends; the State Street SPDR Dividend ETF (AMEX: SDY ) may be interesting to investors in these turbulent times. Although the SPDR Dividend fund has not dodged the nearly 40% rout of the Dow Jones Industrial average completely, it has fared better than the overall market in the past year, turning in only a 29% decline.
Inception date: Nov. 8, 2005
Expense ratio: 0.35%
Net assets: $280 million
The SPDR Dividend fund tracks the S&P High Yield Dividend Aristocrats Index, which is a select group of roughly 50 companies that have increased their dividends every year for at least 25 years. Investing in such long-term dividend-paying stocks should be less risky, as they are not prone to cutting their dividends. As you would expect, the fund carries a healthy dividend yield, which is currently at 5.5%.
Although dividends may carry more weight on the street these days, the fund's selections aren't giving up on the prospect of capital growth as well. Traditionally, financial companies have paid regular dividends, so it should come as no surprise that the fund has 40% of its assets in the financial sector -- well ahead of the roughly 20% allocated to utilities. Synovus Financial (NYSE: SNV ) , Associated Banc (Nasdaq: ASBC ) , and Comerica (NYSE: CMA ) round out the top three holdings, while non-financial stocks include Gannett (NYSE: GCI ) and Consolidated Edison (NYSE: ED ) .
Fund prospects and risks
As you can see, the SPDR Dividend fund has two fairly concentrated sector bets. Even though the fund requires a history of dividend payments for its investments, that doesn't guarantee that it will manage to avoid losses from high-yielding stocks that are in the process of running their businesses into the ground.
In particular, with discussion of possible tax hikes on dividend income if Democrats win the presidency, the election may well prompt a sell-off in these stocks. Yet with dividends prized as proof that a company can generate cash, it's hard to envision this as a severe risk. The fund has an established track record and a low expense ratio, along with a portfolio that does have at least some exposure to various sectors and stocks.
For investors looking for a core portfolio holding, this fund should not be considered a proxy for a broadly diversified fund such as the Vanguard Extended Market Index ETF. However, the fund's portfolio of long-term dividend-paying companies has thus far protected an investor to some extent during the overall decline in the market. With capital gains a fleeting target these days, the stable payments that dividends provide could make this fund a delightful alternative to less cash-flow focused investments.