Both the iShares Core High Dividend ETF (NYSEARCA:HDV | HDV Price Prediction) and the State Street SPDR Portfolio S&P 500 High Dividend ETF (NYSEARCA:SPYD) are popular names, with billions in capital flowing to them. We are entering an environment where growth stocks are slowing down, even though their underlying fundamentals are strong.
Wall Street no longer wants to pay a rising premium for these stocks, and it sees a murky future instead. On the other hand, dividend stocks are increasingly becoming promising as they give you income, plus a defensive footing. These dividend stocks have again become competitive against Treasuries, as lower interest rates have caused their yields to fall.
But among HDV and SPYD, I recommend that you buy one. Why is that? Well, let’s find out.
How to Identify a dividend ETF “trap”
Before singling out the dividend ETF that is more trap-like, let’s first learn the characteristics of what a bad dividend ETF looks like.
They often have dividend yields that are either too high or too low, often paired with a roster of stocks that strip away the advantages of holding a dividend ETF in the first place. The most obvious examples are covered-call ETFs that hold tech stocks and masquerade as dividend stocks. They are not meant to be held for the long run and are essentially returning you the rally’s gains as yield. When the market crashes, they will too, and the recovery will be even longer as their capital gains are capped.
Neither HDV nor SPYD is a covered call ETF, so where’s the trap?
The trap lies in the stocks they hold, and the dividend yield produced by those holdings. If you have a low dividend yield, stocks that don’t grow that dividend yield fast enough, and a top-heavy structure, it’s not worth holding.
I like SPYD over HDV – here’s why the latter is a trap
HDV looks good on paper. It has gained 11.2% since the start of the year, and you get a 2.89% dividend yield. However, just because an ETF is off to a great start this year does not mean it is a good holding for the long run.
The most pressing concern with this ETF is that it is too top-heavy. Exxon Mobil (NYSE:XOM) is the largest holding, with 10.44% of the entire fund, followed by Chevron (NYSE:CVX) as the second-largest holding, with 7.33% of the fund. Having over 17% of a fund allocated to oil off the bat works really well when you have tensions in the Middle East, but it’s not really a good strategy for the long run.
As you may already know, oil stocks are extremely vulnerable during global downturns. The last recession took global oil prices into the negatives. I’m not saying that oil stocks can’t do well. They truly are delivering solid gains and are probably going to do so as long as conflicts rage on, but oil is not a stable commodity, and it never will be.
Apart from oil, the top 10 holdings of this ETF constitute 57.9% of the entire fund.
And when it comes to the dividends, it is hardly a “high dividend” ETF. You get a yield of just 2.89%, and the ETF doesn’t even make up for it with the dividend growth. The 10-year dividend growth rate is at just 3.11% annually. This is half the median of 6.22% across all ETFs.
SPYD is much better
The State Street SPDR Portfolio S&P 500 High Dividend ETF is not perfect. SPYD has actually trailed HDV by quite a bit in the past few years. The problem stems from this ETF having a high exposure to real estate, but this is exactly why I like it going forward, among other reasons.
Let’s first take a look at how the holdings are arranged.
You have 84 total holdings with SPYD, and the top holding is allocated just 1.5% of the fund. The top 10 holdings collectively total 13.88% of the fund, which makes it a much better shock absorber.
Second, SPYD gets you higher and faster-growing dividends. The dividend yield is at 4.3%, and the expense ratio is just 0.07%. Dividends have grown at 19.44% annually over the past 10 years, though they have slowed down significantly since. Regardless, it’s still in a much better position than HDV. The headline dividend figure is already above Treasuries and doesn’t leave you hungry for more yield.
Why SPYD lagged behind, and why I think it’ll surge
SPYD lagging is mainly due to the ETF having 25.5% of its holdings allocated to stocks in the real estate sector. These stocks have been hit hard by rising interest rates, and they’re also the archetypal “risky holding” that drives investment away.
Wall Street has been proven wrong in that regard, as real estate stocks absorbed 2022-2023 rate hikes and kept hiking their dividends. The sector learned a lot from 2008 and didn’t fold. Now, investors are much more bullish on the sector. As interest rates come down, I believe real estate is poised to soar. Real estate stocks, especially REITs, give you very high dividend yields, and they’re starting to get you high capital gains on top.
Additionally, SPYD’s tech exposure is at just 2.33% for the entire fund. Minus real estate and tech, 72% of the portfolio is spread across strong and diverse sectors. Yet, you still get a high dividend yield and an ETF that is already up nearly 7% this year.
I believe SPYD’s gains are more durable and worth holding for the long run.
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