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Unpacking SPYD's Reconstitution: 4.31% Yield, New Risks

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Investment Thesis

The intent of today's article is to update shareholders connected nan caller changes to nan SPDR Portfolio S&P 500 High Dividend ETF (NYSEARCA:SPYD) owed to its latest semi-annual reconstitution, effective February 1, 2023. SPYD accrued its REIT vulnerability while decreasing vulnerability to Energy and Utilities stocks, 2 top-performing sectors complete nan past six months. While its 4.31% dividend output remains attractive, nan portfolio's estimated net maturation is negative, its profitability people is low, and its net momentum is weak. SPYD is simply a contrarian play by design, but fundamentals bespeak its holdings are priced debased for a reason, and why you shouldn't expect outperformance anytime soon.

SPYD Overview

Strategy Discussion and Key Exposures

SPYD tracks nan S&P 500 High Dividend Index, selecting nan 80 highest dividend-paying securities successful nan S&P 500 Index successful adjacent weight. Rebalancings occur connected nan past business time of January and July, meaning nan caller portfolio is astir 3 weeks old. SPYD's 0.07% disbursal is simply a awesome characteristic for a high-dividend money since expenses straight effect nett distributions. Furthermore, SPYD has $8 cardinal successful assets nether guidance and a debased 0.02% median bid-ask spread, meaning it's an businesslike measurement to gain a precocious yield.

SPYD's distribution output is 4.78% arsenic of February 16, 2023. However, nan 4.39% Index Dividend Yield fig is much relevant. As of February 17, 2023, my calculations spot nan Index Dividend Yield astatine 4.38%, indicating shareholders should nett astir 4.31% astatine existent prices.

SPYD Yields

State Street

SPYD's assemblage exposures are listed below. Real Estate and Financials are nan starring two, pinch complete 20% each. Utilities travel astatine 12.31%, and SPYD has minimal vulnerability to Energy, Technology, Health Care, and Industrials.

SPYD Sector Exposures

State Street

SPYD's apical 10 holdings are below, though they aren't typical of nan full portfolio owed to their equal-weight nature. Examples see Seagate Technology (STX) and Paramount Global (PARA), which output astir 4%. They are astatine nan apical of nan database because of their important gains this month.

SPYD Top Ten Holdings

State Street

Reconstitution Recap

The Index added 12 holdings astatine nan extremity of January. I've listed their returns for past twelvemonth since nan Index reference day utilized was December 31, 2022.

SPYD Reconstitution Recap - Additions

Portfolio Visualizer

All holdings isolated from for Packaging Corporation of America (PKG) knowledgeable important declines, driving up their yields. PKG enters SPYD nan "right" way, increasing their dividend by 25% successful June.

The Index besides deleted 11 holdings. Most were apical performers, driving down their yields. However, location were immoderate exceptions, for illustration Vornado Realty Trust (VNO). VNO slashed its dividend by 29% this year, though it was telegraphed by guidance erstwhile discussing nan REIT's Q3 2022 results successful November.

 Deletions

Portfolio Visualizer

Apart from these fewer exceptions, that's what investors should expect each February and August instantly pursuing nan reconstitutions. It's a straightforward measurement to bargain nan astir beaten-down S&P 500 stocks and gain a precocious dividend. However, from a full returns perspective, I for illustration stocks to subordinate for nan "right" reasons, for illustration PKG.

SPYD Performance and Dividends

SPYD's way grounds isn't impressive, ranking #12 retired of 17 high-dividend ETFs done January 2023. Its 3.24% summation from February 2022 to January 2023 was only mean for nan category, grounds that its strategy isn't optimal. Screening only for output is simply a flaw. Other ETFs for illustration nan Schwab U.S. Dividend Equity ETF (SCHD) person value screens that investors should consider.

SPYD Performance vs. High-Dividend ETF Peers

The Sunday Investor

On nan affirmative side, SPYD is 1 of nan fewer ETFs pinch a 4%+ dividend yield. It earns a "B+" Dividend Grade from Seeking Alpha and has a respectable 6.88% five-year dividend maturation rate. However, I expect that won't continue, which I'll talk shortly.

SPYD Dividend Grade

Seeking Alpha

A drawback is that not each distributions are qualified, meaning they aren't eligible for preferential taxation treatment. According to State Street's tax summary, 73% of past year's distributions ($1.45 / $1.98) were qualified. With nan further REIT vulnerability this year, expect that fig to decline.

SPYD Fundamentals

The pursuing array highlights basal metrics for SPYD's apical 25 industries. I've provided nan aforesaid fundamentals pre-reconstitution truthful readers tin spot nan effect of nan caller changes.

SPYD Fundamentals By Industry

The Sunday Investor

I want readers to see nan following:

1. Analysts estimate SPYD's income to turn astatine 4.90% complete nan adjacent 12 months, virtually nan aforesaid arsenic its pre-reconstitution figures. However, estimated net per stock maturation is negative. I've seen net expectations alteration crossed nan committee arsenic much S&P 500 companies report. However, SPYD is now nan third-lowest among each dividend ETFs. The Invesco S&P 500 High Dividend Low Volatility ETF (SPHD), which applies a secondary low-volatility surface aft selecting nan apical 50 highest-yielding S&P 500 stocks, is akin astatine -0.02%.

2. SPYD's gross dividend output is 4.38% aliases 4.31% aft expenses. Investors tin expect to gain astir nan nonstop output pinch SPHD, and though I don't urge that fund, it looks amended by comparison.

3. SPYD's constituents person a 7.66% five-year dividend maturation rate, akin to nan fund's 6.88% figure. That apt won't continue, fixed nan fund's anemic income and net maturation rates. If constituents were to raise dividends faster than earnings, investors should expect nan offset to look negatively successful nan stock price. Excluding Real Estate, SPYD's components person an mean 54% dividend payout ratio, somewhat supra their 50% four-year average.

4. Profitability remains a captious issue, arsenic indicated by its 7.45/10 Profitability Score. That fig is little post-reconstitution, suggesting SPYD's additions person debased stock prices that are justified. For example, S&P 500 Electric Utilities stocks person a 7.75/10 people compared to SPYD's 6.42/10. There are respective securities pinch fantabulous profitability scores, but their yields meant they narrowly missed retired connected being added. Perhaps 80 stocks is excessively fewer successful this case.

Electric Utilities Profitability Scores and Dividend Yields

Seeking Alpha

5. SPYD has a disappointing 4.69/10 EPS Revision Score, down from 5.35/10. Again, this indicates stock prices are debased for a bully reason, arsenic analysts are bearish connected nan constituents and downgrading net expectations. As pinch SPHD, analysts whitethorn beryllium wrong, but shareholders look an uphill battle.

6. SPYD trades astatine 19.38x guardant earnings, a three-point summation post-reconstitution. However, astir is linked to nan accrued REIT exposure, wherever accepted valuation metrics don't apply. Excluding these securities, SPYD trades astatine 14.86x guardant earnings. Still, that's only a constituent aliases truthful little than SCHD, which astir will work together is nan higher-quality fund.

Investment Thesis

SPYD's latest semi-annual reconstitution added 12 securities and deleted 11. The changes resulted successful a less-profitable portfolio pinch weaker net momentum for only a humble summation successful dividend yield. SPYD's 4.31% dividend output is its champion feature, though its dividend maturation prospects are constricted because of its antagonistic estimated net maturation rate. For these reasons, I don't urge investors bargain SPYD, and I look guardant to discussing this further successful nan comments conception below.

This article was written by

The Sunday Investor floor plan picture

Build sustainable portfolio income pinch premium dividend yields up to 10%.

I execute independent basal study for complete 850 U.S. Equity ETFs and purpose to supply you pinch nan astir broad ETF sum connected Seeking Alpha. My insights into really ETFs are constructed astatine nan manufacture level are unsocial alternatively than surface-level reviews that’s modular connected different finance platforms. My deep-dive articles ever see a group of replacement funds, and I americium progressive successful nan comments conception and fresh to reply your questions astir nan ETFs you ain aliases are considering.

My qualifications see a Certificate successful Advanced Investment Advice from nan Canadian Securities Institute, nan completion of each acquisition requirements for nan Chartered Investment Manager (CIM) designation, and a Bachelor of Commerce grade pinch a awesome successful Accounting. In addition, I passed nan CFA Level 1 Exam and americium connected way to go licensed to counsel connected options and derivatives successful 2023. In November 2021, I became a contributor for nan Hoya Capital Income Builder Marketplace Service and negociate nan "Active Equity ETF Model Portfolio", which arsenic a full return objective. Sign up for a free proceedings today! Hoya Capital Income Builder.

Disclosure: I/we person a beneficial agelong position successful nan shares of SCHD either done banal ownership, options, aliases different derivatives. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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