The Value of Dividend Growth Strategies to Portfolios Today and Beyond

In times of uncertainty, pivoting away from concentration and leveraging the stability of a dividend growth strategy with the SPDR® S&P® Dividend ETF can potentially help investors reduce the impact of volatility.

Dividend growth strategies can feel like your father’s — or grandfather’s — Oldsmobile compared to the glitz and glamour of AI stocks. But when market volatility increases, seemingly stodgy dividend-payers often become attractive for their stability.

Companies committed to the consistent return of shareholder value typically demonstrate quality traits like balance sheet strength and reliable cash flow, which help them withstand economic uncertainty. And dividend growth funds — like the SPDR® S&P® Dividend ETF (SDY) — that focus on firms that have consistently increased their annual dividend payouts each year can help investors meet market uncertainty with enhanced equity income, improved diversification, and lower market drawdowns.

SDY Offers Exposure to Firms With Over Two Decades of Dividend Increases

Talk about stability. Launched in 2005, the SPDR® S&P Dividend ETF (SDY) seeks to track the S&P High Yield Dividend Aristocrats Index, which screens for firms within the S&P 1500 Index that have consistently increased their dividend per share for at least 20 consecutive years. The holdings are then weighted based on their current indicated yield.¹

The average yearly increase for the more than 140 firms in the fund is 34 years and nine constituents have over 60 consecutive years of dividend increases (Figure 1). These are companies that started raising their dividends when John F. Kennedy was president and before the Beatles arrived in the US.

Track records like this demonstrate these firms’ consistent ability, and willingness, to return greater shareholder value across different market regimes, economic environments, and macro cycles.

The emphasis on stability and consistency of dividends results in a roster of household names like Coca-Cola, Verizon, Pepsi, Johnson & Johnson, IBM, Exxon, and McDonald’s. And SDY’s top 10 holdings illustrate the diverse nature of firms returning value to shareholders (Figure 2).

Enhance Equity Income: Dividends Can Preserve Purchasing Power by Outpacing Inflation

Following the sizable runup in equities over the past few years — market gains fueled by mega cap growth non-dividend paying stocks — the S&P 500 Index’s dividend yield (1.34%) is less than half its historical average payout percentage (2.75%).² Today’s rate is also well below inflation, both based on today’s levels of inflation (2.8%) as well as the historical inflation rate over the past 20 years (2.6%) and the five-year forward breakeven inflation rate (2.2%).³

But SDY’s index, given its focus on reliable dividend payers, has a trailing 12-month dividend yield of 2.9%.⁴ That rate is above the market’s historical payout and measures of inflation — indicating the potential for both enhanced nominal equity income and enhanced real equity income.

Historical trends indicate the same result. Since inception, SDY has consistently exhibited higher trailing 12-month dividend yields than those of a comparable broad market exposure (S&P 1500 Index), due to the selection approach and yield-weighted methodology of SDY’s index.

SDY has produced a consistent yield premium over the market — an average trailing 12-month yield of 3.6%, ranging from a low of 2.5% to a high of 7.2%. In comparison, the broad market composite has averaged a yield of 1.9%, ranging from a low of 1.3% to a high of 2.4%. On average, SDY has out-yielded the S&P 1500 Index by 112 basis points (Figure 3).
 

Improve Diversification: Limit Exposure to Mag 7 and Concentration

For investors concerned about the concentration of mega-cap growth stocks in their US equity exposures, SDY offers a way to remain invested in US equities with less concentration on current market leaders. In fact, SDY holds only one of the Magnificent 7 stocks — and at a relatively small weight given Microsoft’s low yield.

SDY is also less top heavy than the broad market; its top 10 stocks comprise just 19% of the total exposure compared to 31% for the S&P 500 Index and 32% for the broader S&P 1500 Composite Index.⁵ And the max weight of a firm within SDY is just 3% compared to around 7% for the broad market — another indication of lower stock specific risk.⁶

SDY also can diversify the market portfolio’s heavy Growth bias. The S&P 500 Index allocates 30% to Growth stocks, just 10% to Value exposures,⁷ and the rest to “core” buckets.

But SDY allocates 20% to pure Value, just 4% to pure Growth, and the rest to “core.”⁸ A 50/50 split between the market and SDY brings better balance to a broad US equity allocation. The weights to pure Growth and pure Value of this 50/50 mix would be 17% and 15%, respectively, diversifying the heavy Growth bias investors inherit now when owning the “market.”

SDY’s diversification extends to sectors. While the market is heavily concentrated among tech and tech-like sectors, SDY is less reliant on one specific sector (Figure 5).

No one area makes up more than 20% of SDY and no sector has a weight below 3%, unlike the broad market’s three. SDY’s one sector that is near 3% is a tech-related sector — meaning if used alongside the broad market, SDY can reduce concentration in single names while also broadening sector exposure.

SDY also offers greater market cap diversification. By allocating across the spectrum of large-, mid-, and small-cap companies, SDY takes advantage of the resilience of dividend growers across the cap spectrum and embeds the potential benefits of small-size factor tilt alongside its dividend/Value bias.

Mitigate Market Drawdowns: Average Drawdown Is Lower Than the S&P 1500 Index’s

Given their higher quality, time-tested organizational profile and a track record of consistently returning value to shareholders through various economic weather, dividend growth stocks have historically held up better than the overall market during times of stress. Since SDY’s inception nearly 20 years ago, the fund has had a lower average monthly drawdown that the broader market, as measured by the S&P 1500 Index (Figure 7).

The same trend holds when looking at the worst 15 months for the market. The average drawdown for the market over its 15 worst months since 2005 is -9.4% compared to -9.1% for SDY.⁹ This underscores how reliably boosting dividends for decades illustrates companies’ financial strength and discipline, which is especially attractive in times of uncertainty.

SDY’s Role in Today’s Portfolio

Continued uncertainty around tariffs and trade, stubborn inflation, and monetary policy mean market volatility is likely to continue. Investors looking to stabilize portfolios can consider allocating to SDY, an all-cap equity income exposure with quality, value, and size biases, to help:

1. Enhance equity income at a time when traditional stocks are yielding far less than normal.
2. Reduce the concentration risks in broad market US exposures like the S&P 500 and S&P 1500.
3. Stabilize portfolios with lower average monthly drawdown than the broader market in times of stress.

Sure, dividend investing can be a longer road to building wealth than with the returns investors have gotten used to over the past few years. But SDY’s blend of equity income and potential for market-based capital appreciation may provide just what investors seek in today’s uncertain environment — the comfort of a Sunday drive.