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Standard & Poor's


02/26/15 05:00:23 PM


For many ETFs, one of the benefits is their truly passive approach and the consistency of holdings. The companies that you have exposure to in today's iShares S&P 500 Index (IVV 204 Overweight) would largely be the same as last year and what you likely will have next year. However, with rules-based ETFs that became increasingly popular in recent years, S&P Capital IQ thinks an ongoing review of the holdings is important since they can and will change. One good example we think is SPDR S&P Dividend (SDY 78 Marketweight).

S&P Dow Jones Indices, which operates independently from S&P Capital IQ, runs the S&P High Yield Dividend Aristocrats Index used by SDY with constituent changes that are effective January 30. The index consists of S&P 1500 Index companies that raised their dividend for 20 or more consecutive years. As such, when companies are added to the individual S&P's large-, mid- and small-cap indices or they reach that 20-year milestone, they are added to the aristocrats' index. Meanwhile, when companies fail to continue their string of dividend increases, they are removed from the index.

Before we discuss the changes, let's discuss SDY in its current state. The dividend-focused ETF is diversified across the ten GICS sectors, though financials (21% of assets), consumer staples (15%), industrials (14%) are the largest, while stakes are much smaller in info technology (3.5%), energy (3.3%) and telecom services (3.1%). The ETF sports a 2.3% dividend yield, has a 0.35% expense ratio and trades with a $0.02 bid/ask spread. Overall, SDY's S&P Capital IQ ranking is aided by its holdings of many stocks for above-average S&P Capital IQ Quality Rankings, though we think many are fairly valued.

Seven companies are scheduled to be added to the index, three of which are in the financials sector. Essex Property (ESS 227 ***) and Realty Income (O 55 NR) are Real Estate Investment Trusts (REITs) that raised their dividend over the last 20 years, while insurance company Mercury General (MCY 58 NR) has done so for 28 years.

Others that will join the aristocrats index are Ross Stores (ROST 94 ****) and Expeditors International (EXPD 45 ***), from the consumer discretionary and industrials sectors, respectively. ROST has an A+ S&P Capital IQ Quality Ranking, while EXPD has an A.

Meanwhile, three companies will be dropped from the index: Diebold (DBD 32 **), Energen (EGN 63 **) and Family Dollar Stores (FDO 76 ***). DBD, an information technology, held its dividend flat in 2014, while EGN, an energy company, cut its dividend during the fourth quarter. According to Howard Silverblatt, senior index analyst from S&P Dow Jones Indices, FDO did not pay a dividend in the fourth quarter due to its pending sale to fellow consumer discretionary company Dollar Tree (DLTR 71 ****).

In 2014, SDY rose 13.8%, fractionally ahead of the 13.6% gain for IVV and the 13.0% for the iShares Core Total Stock Market that latter that holds all 1,500 stocks in the broader index. Meanwhile, for the year to date, SDY's 0.6% decline is also stronger than the two more diversified iShares ETFs. However, as we've mentioned previously, past performance is not necessarily indicative of future results. We encourage investors seeking exposure to companies with long record of dividend growth to look closely at SDY and what's inside the portfolio.


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