Exchange traded funds (ETFs) with an emphasis on dividends have become increasingly popular amid the pandemic. Though the market is on an incredible run right now, many investors are shifting some of their investments to secure stable and reliable of income to hedge their portfolio against a market correction or crash that could be triggered by the surging coronavirus infections, uncertainties around the effectiveness of vaccines, or both.
The Federal Reserve took an accommodative stance this year to help the US economy recover from the effects of the coronavirus pandemic. The Fed has left interest rates near zero and signaled that it will keep rates at that level at least through 2023. This will likely make the bond market unattractive next year as well. Hence, dividend investing is arguably one of the best options now.
Betting on individual stocks could be risky though. ETFs, in contrast, help investors mitigate this risk by delivering exposure to a broad and diversified basket of stocks at minimal operating costs. This is an appealing vehicle for investors seeking to implement a sector rotation strategy that may gain from the economic recovery as the pandemic subsides next year.
SPDR S&P 500 ETF Trust (SPY), Financial Select Sector SPDR Fund (XLF), Industrial Select Sector SPDR Fund (XLI) and Consumer Staples Select Sector SPDR Fund (XLP) are four dividend-paying ETFs that not only hold immense price appreciation potential but could also be a steady source of income.
SPDR S&P 500 Trust ETF (SPY)
SPY is the best-recognized, oldest, and most heavily traded US-listed ETFs. The fund seeks to provide investment results that correspond to the performance of the S&P 500 Index. The S&P 500 Index is a diversified large cap US index that holds companies across all eleven GICS sectors. The Trust holds a portfolio of the stocks corresponding to the weight of such stock in the index.
The ETF has an impressive record of paying quarterly dividends. The most recently declared dividend by SPY was $1.34 in September. The fund has grown its dividend at a CAGR of 7.4% in the past three years. While the four-year average dividend yield for SPY is 1.86%, the ETF’s annual dividend cumulates to $5.68, translating into a dividend yield of 1.53%.
SPY has $325 billion as AUM and an expense ratio of 0.09%. The ETF has an MSCI ESG Fund Rating of A based on a score of 6.70 out of 10.
The fund currently holds 506 companies, with the information technology sector leading the way with nearly 33.6% weightage. The ETF also has 14.4% and 13.9% exposure to Consumer Cyclicals and Healthcare sectors, respectively. The top 3 holdings of the fund are Apple Inc (AAPL), Microsoft Corporation (MSFT) and Amazon.com Inc. (AMZN), with weights of 6.5%, 5.3% and 4.4%, respectively.
With a year-to-date gain of 15%, SPY closed yesterday’s trading session at $370.19, after hitting its all-time high of $370.78. The ETF has witnessed net inflow of $7.87 billion in the past month and is up 5.7% in the same period.
How does SPY stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
A for Industry Rank
A for Overall POWR Rating.
You cannot ask for better. It is ranked #1 out of 198 ETFs in the Large Cap Blend ETFs group.
Financial Select Sector SPDR Fund (XLF)
The investment objective of the XLF is to provide investment results that correspond to the performance of the S&P Financial Select Sector Index. The index seeks to provide an effective representation of the financial sector of the S&P 500 index. The ETF offers extremely liquid exposure to the heavyweights in the US financials segment, including financial services, insurance, commercial banks, capital markets, REITs, thrift & mortgage finance, consumer finance, and real estate.
XLF pays dividends on a quarterly basis, and the last pay-out made by the fund was $0.1353 in September. The ETF has grown its dividend at a CAGR of 13% over the past three years. While the four-year average dividend yield for XLF is 1.90%, the current annual dividend of $0.54 translates into a 1.88% yield.
XLF has $23.43 billion in AUM and an expense ratio of 0.13%. The ETF has an MSCI ESG Fund Rating of BBB based on a score of 5.04 out of 10.
The fund currently holds 66 companies with weightings of 36.5% in Banks, followed by 26.3% and 17.9% in the Capital Markets and Insurance sectors, respectively. The top 3 holdings of the fund are Berkshire Hathaway Inc. Class B (BRK.B), JPMorgan Chase & Co (JPM) and Bank of America Corp (BAC), with the weights of 14.1%, 11.5% and 6.9%, respectively.
XLF has lost 6.5% year-to-date to close yesterday’s trading session at $28.76. However, the ETF has witnessed net inflows of $1.97 billion in the past month and has gained 15.3% in the same period. XLF is presently trading just 8.3% below its 52-week high of $31.38.
XLF’s POWR Ratings reflect a promising outlook. It has an overall rating of “Strong Buy” with an “A” for Trade Grade and Buy & Hold Grade, and a “B” for Peer Grade and Industry Rank. Among the 38 ETFs in the Financial Equities ETFs group, it’s ranked #1.
Industrial Select Sector SPDR Fund (XLI)
XLI seeks to provide a broad exposure to the US industrial sector. The ETF is designed to provide investment results that correspond generally to the performance of the Industrial Select Sector Index, an effective representation of the industrial sector of the S&P 500 Index. The fund invests primarily in industry groups, such as capital goods, commercial & professional services, and transportation.
XLI has grown its dividend at an average rate of 7.2% in the past three years. The last pay-out by the ETF was $0.31 in September. While the four-year average dividend yield for the ETF is 1.97%, the current annual dividend of $1.41 translates into a 1.58% yield.
XLI has $15.91 billion as AUM and an expense ratio of 0.13%. The ETF has an MSCI ESG Fund Rating of A based on a score of 6.39 out of 10.
The ETF has a 19.8% weighting in the Aerospace & Defense, followed by an exposure of 19.3% and 14.5% to the Machinery and Industrial Conglomerates sectors, respectively. The top 3 of 74 holdings of the fund are Honeywell International Inc. (HON), Union Pacific Corporation (UNP), and Boeing Company (BA) with weights of 5.6%, 5.4% and 4.8%, respectively.
XLI has gained 9.5% so far this year to close yesterday’s trading session at $89.21. The ETF has witnessed net inflow of $1.89 billion in the past month and has gained 9.7% in the same period. XLI is presently trading just 1% below its 52-week high of $90.16.
XLI is rated “Strong Buy” in our POWR Ratings system. It also holds an “A” in Trade Grade and Buy & Hold Grade. It is ranked #1 out of 32 ETFs in the Industrials Equities ETFs group.
Consumer Staples Select Sector SPDR Fund (XLP)
XLP offers an effective exposure to the US consumer staples sector. The ETF seeks to provide investment results that correspond generally to the performance of the Consumer Staples Select Sector Index, a representation of the industrial sector of the S&P 500 Index. XLP seeks to provide exposure to stocks in the following industries: food and staples retailing, beverage, food products, tobacco, household, and personal products.
XLP pays quarterly dividends and paid out $0.38 per share in September. It pays an annual dividend of $1.64, which yields 2.43% on the prevailing price. XLP’s 4-year average dividend yield is 2.71% while the ETF has grown its dividend at a CAGR of 7.3% in the past three years.
XLP has $13.52 billion in AUM and an expense ratio of 0.13%. The ETF has an MSCI ESG Fund Rating of A based on a score of 6.63 out of 10.
The fund currently holds 32 companies with a maximum exposure of 26% to the Household Products sector. This is followed by a 25% and 20% exposure to Beverages and Food & Staples Retailing sectors, respectively. The top 3 holdings of the ETF are Procter & Gamble Company (PG), Walmart Inc. (WMT), Coca-Cola Company (KO), with weights 16.8%, 10.1% and 10%, respectively.
XLP closed yesterday’s trading session at $67.72, gaining 7.6% year-to-date. Though the ETF has witnessed a net outflow of $875.5 million in the past three months, it is up 5.6% in the same period. XLP is presently trading just 0.7% below its all-time high of $68.18.
It is no surprise that XLP is rated a “Strong Buy” in our POWR Ratings system. It also has an “A” for Trade Grade and Buy & Hold Grade, and a “B” for Industry Rank. Among the 42 ETFs in the Consumer – Focused ETFs group, it’s ranked #2.
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SPY shares were trading at $366.85 per share on Wednesday afternoon, down $3.32 (-0.90%). Year-to-date, SPY has gained 15.61%, versus a % rise in the benchmark S&P 500 index during the same period.
About the Author: Sidharath Gupta
Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.
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