ETF Eyes Low-Risk Dividend Payers

11/14/2014 9:00 am EST

Focus: ETFs

Roy Ward

Chief Analyst, Cabot Benjamin Graham Value Investor

Don’t dally; it's time to invest extra cash during the next couple of weeks to take advantage of the seasonally bullish November-to-May phenomenon, counsels J. Royden Ward, editor of Cabot Benjamin Graham Value Investor.

For a diversified, low-risk investment, we suggest the SPDR S&P Dividend ETF (SDY), which holds all the companies in the S&P 1500 Index that have raised their dividends every year for the past 20 years.

The objective of SDY is to include companies which have increased their dividends consistently. Only 95 qualify out of 1,500 companies.

Companies with pristine dividend records tend to produce solid earnings and sustainable business models.

Also, management is less likely to engage in reckless capital spending if one of the goals of management is to protect and grow the company’s dividend.

SDY sells very near its net asset value. The P/E ratio, based on current EPS of the stocks contained in the ETF is 18.9, and the P/BV ratio is 2.73. Both ratios are reasonable. Management fees total 0.35%.

The ETF is quite well diversified with risk spread out over 99 holdings. The largest position consumes only 2.69% of the total portfolio.

The ten largest holdings in order of size are HCP, AT&T, Consolidated Edison, National Retail Properties, People’s United Financial, McDonald’s, Chevron, Leggett & Platt, Target, and AbbVie.

The five largest sectors are Financials (21.4% sector allocation), Consumer Staples (15.2%), Industrials (14.7%), Utilities (11.2%), and Materials (10.6%).

Because of its 2.2% yield and steady performance, SDY is a great substitute for bonds. I expect SDY to reach my minimum sell price target of $105.00 within two years.

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