Be Wary of High Dividend Investments

Just because an ETF or a stock has a “high” dividend, it doesn’t necessarily draw me in as a investor. Sometimes it is high simply because it is a higher risk. However, if an ETF holds many of the individual stocks I already own and like, and other stocks that I would consider owning, my interest is heightened. Such is the case of an ETF I recently purchased for Cindie and for me. The ticker symbol for the ETF is SPYD.

Some General Observations

Of the seventy-seven positions currently in SPYD (SPDR Portfolio S&P 500 High Dividend ETF), I already own stocks in 21. That is about 27%. Furthermore, of the top ten, we own four: STX, IRM, MPC, and VLO.

A partial view of the holdings. Links are provided below if you want to see all of them.

Expense Ratios and Holdings

One of the first things I look at is the expense ratio. While a higher expense ratio may not be a terrible thing, a low one is generally worth a second look. The second look I always perform is to look at the top ten holdings and ask myself, “Would I buy shares in this company?” While I cannot say I like every company in the top ten, the relative “weight” of ownership is less than 2% for all of the 77 stocks. Furthermore, the top ten are less than 17% of the total investment. Therefore, the diversification and share position weightings are favorable factors.

Know the expense ratio and look at the trading volume when buying an investment of any type.

Sector Weightings

Investment diversification also means that I want to see the weightings of the investments by sector. In the case of SPYD, Financials, Real Estate, Energy, and Utilities are all more than ten percent each. Buying this investment recognizes the risks each of these sectors may experience. If you are nervous about real estate or energy, for example, then the weightings of SPYD are probably not for you. I, for one, prefer a heavier weighting in health care and technology, so I buy other investments to meet those requirements. However, as I slowly (very slowly) transition away from individual stocks, increasing my holdings of VYM, SCHD, DGRO, DVY, and SPYD makes good sense to me.

The weightings can reveal both opportunity and risk.

Dividend Trends

Another indicator worth noting, if you are a dividend growth investor, is the growth of the dividend. In the case of SPYD, it is best to compare quarter-to-quarter, as the dividends fluctuate by quarter. So, for example, I looked at the comparable dividends for the first quarter of the last five years. Those are shown with a green highlight in the following graph. I also like to quickly review the Seeking Alpha dividend grades to see if there are any serious red flags. That image is also shown below.

Compare January with January of each year. That helps you see the real trend when the dividend bounces from quarter-to-quarter.
It is too late to get the June dividend. However, I bought before the Ex-Dividend Date.

Seeking Alpha ETF Grades

Again, the grading system is helpful in recognizing potential problems with an ETF. In the case of SPYD, the “Momentum” grade of “D+” is a clue that I should not expect a huge amount of growth in the overall investment. I’m buying this ETF primarily for income. There is, however, sufficient trading activity for this ETF so that I could sell if I wanted to if the yield got too low as asset prices increase.

Summary

While SPYD is not yet a huge holding for us, I can see that I might add more as I pick fewer individual stocks. It will never be as big of a holding as VYM and SCHD, but it contains investments I like but don’t want to buy as individual stocks. The manager of this ETF appears to have similar views about good long-term investments. If you want to see all of the holdings in this ETF, including all of the stocks we already hold that are in this ETF, go to this Dropbox link for the Excel spreadsheet or PDF version. (NOTE: I run McAfee LiveSafe on my computer!)

Full Disclosure

Cindie and I own 100 shares each (200 total) of SPYD as a long-term investment. I may add more over time during times of market fear. Cindie holds her shares in a taxable brokerage account, and I have mine in my ROTH IRA.

LINK: SPYD ETF.COM LINK