Slow Is Smooth and Smooth is Fast: Going the Distance With SPYD
It's not hitting any all-time highs, but reinvesting dividends into an S&P Index might be a meaningful part of a long-term Growth and Income strategy. See the Weekly chart below.
When I was an infantryman in the US Marine Corps we had a saying, “Slow is smooth, smooth is fast.” The point of this saying is to get Marines to focus on their movement and not their speed because foot placement is everything when you’re running in and out of buildings with gear stacked all over your body. The smoother you become, the less risk you run of tripping over yourself as you run up and down stairs or through the woods. And the less risk trip over yourself, the faster you get to your destination. Enter if you will into our world of investing – the SPDR Portfolio S&P 500 High Dividend ETF, ticker symbol SPYD. Some people want to get rich quick, but I find that the most successful investors are the ones who are perfectly ok with getting rich slow.
If SPYD was a piece of Marine Corps gear, we would call it ‘high speed, low drag” because of its commitment to a high dividend and low cost to own. As of mid-May of this year, the fund’s yielding 4.48%. This is particularly attractive for those looking to generate a consistent income stream that is a vital component for long-term financial planning. Moreover, the cost-effectiveness of SPYD is a close runner up to what gives it its allure. An expense ratio of only .07% has it ranking as one of the more affordable options in the entire ETF landscape. This low overhead means more of your money goes toward growing your wealth rather than covering operational expenses.
But let’s take a deeper dive to understand why I’m liking SPYD right now. When you consider the comparative performance of SPYD to the S&P 500 index over the last twelve months, it might seem counter intuitive to consider this ETF but bear with me for a moment. While the S&P 500 has seen a gain of 26% over the last 12 months as the markets have recovered, SPYD has seen a trend of - 10%.[i] Seeing as how SPYD is an index of the top 80 dividend-yielding stocks from the S&P 500, you might ask how it has lost value while the S&P 500 index has gained over 26%? Well, the answer lies in the earnings of those top 80 companies. Over the last two years, earnings of S&P 500 companies have shown a mix of declines and growth, painting a complex picture of market performance.[ii] However, in the latter part of 2023, these companies have begun to show resilience with 80% surpassing earnings per share (EPS) expectations. In fact, the year-over-year growth rate for Q# 2023 was a strong 13.9% which stand in sharp contrast from the 4.3% in Q2 and the 2.6% in Q1.[iii]
This recent improvement in earnings coupled with recent consumer spending trends create a positive outlook for dividend paying companies. Between August and November of 2023, consumers showed modest monthly spending increases indicating a continued albeit cautious spending pattern.[iv] [v]During this same time, SPYD fell over -15% only to recover 12% by the end of November. From a more technical look at the chart, SPYD appears to be garnering investor interest in breaking up over multi-month resistance at $40 per share.
So long as economic data is pointing toward better news on things like inflation, jobs, consumer spending etc. we may very well see the Fed execute a much-anticipated rate cut. Should that happen there will be a fresh push of money looking for better yields and they will find them among the companies in SPYD, the SPDR S&P 500 High Dividend ETF. It seems that earnings have kept SPYD lower than the rest of the S&P 500 but now that certain economic data seems to be turning the tide in favor of the “soft landing” the Federal Reserve has been hoping for, this ETF could not only continue to pay its dividend but also become attractive for the potential it carries in capital appreciation.
Take aways:
SPYD has distance to cover before it catches up with the S&P Index – its lagging behind due to nearly two years of poor earnings reports.
Now that the economic data is beginning to point toward a soft landing, it is possible that better earnings as well as interest rate cuts could fuel more demand for higher dividends and drive the price of SPYD shares up.
[i] S&P 500 Earnings (ycharts.com)
[ii] S&P 500 Earnings Season Update: January 27, 2023 (factset.com)
[iii] S&P 500 Q3 2023 Sector Earnings & Revenue Data | S&P Global Market Intelligence (spglobal.com)
[iv] Consumer Spending | U.S. Bureau of Economic Analysis (BEA)