The S&P 500 index is offering investors a tiny yield of just 1.2% right now. You can do much better than that with SPDR Portfolio S&P 500 High Dividend ETF (SPYD 0.71%), which has a 4.2% yield. That's a full three percentage points higher! What you get when you buy this exchange-traded fund (ETF) is nuanced, but if you are a dividend investor, it is a simple way to add high-yield exposure to your portfolio.
What does SPDR Portfolio S&P 500 High Dividend ETF do?
The fishing pool for SPDR Portfolio S&P 500 High Dividend ETF is the S&P 500 index, which is an important starting point. This index is hand-selected so that the companies included in the index are large and representative of the broader economy. Although that's not a guarantee that a company is going to be well run, it does weed out a lot of less desirable investment choices.
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From there, the SPDR Portfolio S&P 500 High Dividend ETF's approach is very simple to understand. It lines up the companies in the S&P 500 index by yield. The highest-yielding 80 companies get into the index. However, unlike the S&P 500 index, which is market cap weighted, SPDR Portfolio S&P 500 High Dividend ETF uses an equal weighting methodology. This means that each stock has the same opportunity to impact the ETF's performance. However, it also means that the SPDR Portfolio S&P 500 High Dividend ETF isn't going to be unduly hurt by any single investment, either.
If you like to keep things simple, SPDR Portfolio S&P 500 High Dividend ETF is a great income option. The equal weighting, while perhaps limiting upside potential, is a good risk/reward trade-off because it protects investors from poorly performing stocks. Add in the lofty 4.2% dividend yield, and if you have $1,000 or less, this ETF is a solid foundation for an income portfolio. And the cost is a very modest 0.07% expense ratio.
There are some caveats to consider
The word "foundation" is important because SPDR Portfolio S&P 500 High Dividend ETF is probably not a great one-and-done type of investment. By design, it will focus heavily on the sectors within the S&P 500 index that are known for having high yields. That list includes real estate investment trusts (REITs), utilities, and financials. Taken together, these three sectors make up just over 50% of the ETF's assets. That's a lot of exposure to a fairly small group of companies. If history is any guide, those three sectors will generally be the largest in the ETF most of the time.
Diversification is important, and SPDR Portfolio S&P 500 High Dividend ETF simply doesn't offer as much diversification as you may expect. There are some second-order effects here. First, if you use SPDR Portfolio S&P 500 High Dividend ETF as a foundational investment, you'll want to make sure you don't go out and buy more (or at least too many more) investments in the REIT, utility, and financial sectors. Also, if you are adding this ETF to your existing portfolio, you'll want to ensure that there aren't any material overlaps on the holdings front.
That said, companies working through hard times are another type of company that will likely get into this ETF fairly frequently. Often, out-of-favor companies, out-of-favor sectors, and turnaround situations have high yields. The list will change as the SPDR Portfolio S&P 500 High Dividend ETF rebalances its portfolio annually, but if you are a contrarian investor, you might find you end up with double exposure to higher-risk companies if you aren't careful.
Used wisely, SPDR Portfolio S&P 500 High Dividend ETF is a great option
There are a lot of dividend-focused ETFs that you can buy. SPDR Portfolio S&P 500 High Dividend ETF is a simple-to-understand choice that can be included in a portfolio as a foundational investment fairly easily. The key is to understand both the benefits and the limitations of the ETF's approach so you can make the best use of it.
