SPHD: A Monthly Dividend ETF With A 3.5% Yield That Is Growing Stronger
Summary SPHD offers an excellent dividend yield of 3.5% with monthly payments. The ETF has a moderate expense ratio. The sector allocations look great and the volatility over the last few years has been lower than the domestic equity market. The PowerShares S&P 500 High Dividend Portfolio ETF (NYSEARCA: SPHD ) looks great. After readers suggested I take a look at the portfolio, I decided it was time to dive inside and see what I could find. This is a very solid ETF. Investors may quibble on whether the allocations are perfectly or merely good, but there is far more to like than to hold against the fund. As you’ll see in the article, I find the sector allocation to be a bigger selling point than the individual holdings. Expenses The expense ratio is a .30%. This is fairly mediocre for expense ratios in my estimation, but there have been quite a few funds coming up lately with expense rates that are downright excellent. Dividend Yield The dividend yield is currently running 3.50%. For the investor that wants a very strong dividend yield to support them in retirement, this should certainly qualify. Investors can create a stronger yield by selecting individual companies, but they are creating a high yield portfolio that is exposed to substantial risk of dividend cuts when they allocate aggressively to companies that are yielding materially higher than this portfolio. There are two other things to like about the dividend here. One is that the dividend is paid out on a monthly basis which many investors appreciate because it is easier for them to plan around. The other is that the 3.5% dividend yield is based on trailing dividends rather than forward dividends and the dividends have been moving slightly higher over the last year. The dividend went from around 9 and a half cents per month to over 10 cents per month. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: Seeing AT&T (NYSE: T ) and Verizon (NYSE: VZ ) with medium weights is one area where I tend to feel conflicted. Investors won’t see the Verizon in the chart, but I rarely find ETFs that only hold one. When I checked the rest of the holdings I found Verizon was represented with 2.22% of the portfolio. The dividend yields are great but the sector is becoming more competitive. On the upside any technology that actually makes them obsolete or at least incapable of growing earnings would be indicative of the investor having a lower cell phone bill, so there is another benefit to aligning the portfolio to match an investor’s individual expenditures. Honestly, is there any better way to pay your phone bill than with a dividend check from the phone company? This is a difficult one to come down on because I love the strategy of covering a cost with dividend income from the company, but I’m also concerned that Sprint (NYSE: S ) is offering a very viable competitive product. Their reception may be terrible in some cities, but they are great in Colorado Springs. Since the allocations are less than 5% of the portfolio combined, I think the representation here is pretty reasonable. I also see Realty Income Corp (NYSE: O ) as an easy choice for investors looking for solid growth in income. The triple net lease REIT has an excellent history of raising dividends. They pay their dividends monthly and have raised the dividend 81 times already. They have done an incredible job of executing their investment strategy and it is simpler than it seems. The REIT enters into net lease operations where the tenant is paying most of the operating costs. Realty Income Corporation is acting as an alternative format of financing for their tenant. Their strategy is so successful that they have been acquiring over a billion dollars in real estate each of the last few years. They already acquired almost a billion dollars in real estate in 2015. Sectors Heavy allocation to utilities makes sense for an equity fund seeking lower total volatility levels. The utility companies have a tendency to be partially correlated to equity and partially correlated to bonds which creates a method for a pure equity ETF to reduce volatility by incorporating some exposure that is very similar to bonds. For investors with a diversified portfolio, that means this fund may not get as large of a benefit from being combined with treasuries and other long duration bonds as a total market portfolio would get. Regardless, with investors needing stronger yields in retirement and often going light on bonds in favor of equity, this would be a more rational allocation model than simply going with full market exposure. The allocation to financials provides the shareholders with exposure to REITs that would fall with utilities when rates go up, but it also gives them access to banks that would benefit from higher rates paid on excess reserves. The combination works fairly well to create a portfolio with lower volatility. The heavy allocations to consumer staples also makes sense in that context since consumer staples tend to be a solid sector for taking smaller losses during a recession. I was a little curious about their decision to put 10% into industrials, but when I looked at the individual holdings for the sector it made sense. While General Electric (NYSE: GE ) is seeing their share prices just getting back to where they before the crash, their still offer a sold 3% yield. Volatility Measured since October 2012, this fund has demonstrated annualized volatility of 10.9% compared to 12.6% for the S&P 500. The beta on the fund has been a mere .75. While the fund has not kept up with the S&P 500, it is a very attractive allocation strategy with the market at fairly high valuation levels. For the investor that would like to reduce their risk and is willing to accept a lower long term projected return, this fund fits the bill. If market prices had fallen by 40%, I would try to look at more aggressive allocations. When prices still seem high, I prefer using defensive allocations and this fund offers a great deal of them. Conclusion All around this looks like a solid fund. The only thing I can find not to be excited about is the expense ratio. Even there, the ratio isn’t terrible. It is simply higher than what I am used to paying as I favor the Vanguard and Schwab ETFs. If this fund got larger and dropped the expense ratio, it would be absolutely excellent. I think that might be a viable option for the fund’s sponsor as well since the strong yield and monthly payment with a low expense ratio would create enough demand to warrant significantly more shares of this ETF being created.