Dividends4Life: Weighting by Yield Can Increase Risk

Weighting by Yield Can Increase Risk

Posted by D4L | Tuesday, June 02, 2015 | | 0 comments »

SPDR S&P Dividend ETF (SDY) offers a portfolio of companies with a long track record of increasing dividends. Companies that consistently increase dividends throughout market cycles tend to have sustainable competitive economic advantages or have experienced strong growth. However, weighting these stocks by yield gives the portfolio a tilt toward lower-quality mid-cap and value companies, which may have greater risk or slower growth in the future.

Since its 2005 inception, the fund has provided roughly the same return and standard deviation as a low-cost S&P 500 index fund on a pretax basis but lagged on a post-tax basis. Because of its tilt toward mid-cap and value stocks, the fund is only suitable for risk-tolerant investors or as a satellite holding as part of a diversified portfolio. In order to limit risk, this fund selects only companies that have increased their dividends for 20 consecutive years. Still, there is no guarantee that they will continue to increase dividends in the future.

Source: Morningstar

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