SPYD, SPHD: Dividend Gives S&P 500 Wings

A couple of weeks back, we promised to “share extracts from our weekly reviews.” This article, taken from an analysis originally published for Macro Trading Factory’s subscribers on Nov. 28, is part of that effort.

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Holiday Season ≠ Buying Season

Down 15.5% on Thanksgiving Day, S&P 500 is experiencing the worst start to any year since 2008.

Looking at all the years in the 21st century, you might have some glimmer of hope, however it’s a very small dose (+0.4%) and here’s the bigger problem: The rest of year was negative in 3 out of 7 down years (43%), and in 2 (1) out of 4 (2) down years (50%) with a decline greater than 10% (15.5%).

Yet, the SPX has managed to cross the 4000 mark safely, which is an important step. Important, but not a sufficient step for us to turn bullish.

The key task now for the S&P 500 is to deal with the famous downtrend line (that we’ve drawn so many time in recent months) and the 200-DMA.

They aren’t far, but they may prove way more persistent than they seem.

And let’s not forget that as much as this may sound weird, the recent aggressive and quick move puts the SPX at overbought territory.

Last but not least (for this technical section), the pattern suggests that we might be looking at a “head and shoulders” formation.

If this is indeed the case, the next big move is down.

Most (Too?) Extended Stock Market In A Long Time

The Dow Jones Industrial Average (“DJIA”) is now trading 9.1% above its 50-DMA – the most extended level the Index has been at since June 2020 in the early days of the post-COVID bull.

Since 1990, the DJIA has only traded 9%+ above its 50-DMA during only seven other periods.

The broader S&P 1500 Index is now trading 13% above its October low, and the median stock in the index is now trading 27% (!) above its 52-week low.

It’s not a bull market for the index itself as of yet (though we’re not too far), but it’s already a bull market for the median stock in the index.

Even the VIX has moved toward the bottom end of its recent range, and that’s not necessarily a good sign.

Here’s a reminder of what we have seen this year:

• When VIX > 28.5 >>> SPX is up 15%
• When VIX < 28.5 >>> SPX is down 25%

Stocks perform best/better when there is extreme fear and/or broad strength. Right now, there is little evidence of either.

Dividends Make A Big Difference*

[*Especially during rough times]

2022 is a horrible year for both stocks and bonds.

Nonetheless, among over 30 investment styles covered by Goldman Sachs, “Dividend Growth” comes second, only slightly behind “Low Hedge Fund Concentration”, and far ahead of the S&P 500 index (SP500).

While the S&P 500 most famous tracker (SPY) is down (total return basis) 16.24% YTD, two of the most prominent S&P 500 dividend-oriented ETFs – SPDR Portfolio S&P 500 High Dividend ETF (NYSEARCA:SPYD) and Invesco S&P 500 High Dividend Low Volatility ETF (NYSEARCA:SPHD) – are trading (on average) slightly (+0.33%) above the flatline.

This outperformance of ~16.6% (on average) can’t be described solely by the ~2.5% extra yield (on average) that SPYD and SPHD pay over SPY.

What is it then that makes these ETFs more resilient and better performing?

SPYD Vs. SPHD

The two ETFs are quite similar in nature and holdings. As a matter of fact, there are 46 holdings that appear in both funds (see full list below).

The main difference is the benchmark:

• S&P 500 High Dividend Index for SPYD
• S&P 500 Low Volatility High Dividend Index for SPHD

Here is a comparison between the holdings of the two funds (sorted in alphabetical order):

Ticker	Name	SPYD Weight (as of Dec. 8)	SPHD Weight (as of Dec. 9)
ABBV	AbbVie Inc.	1.404%	1.774%
AMCR	Amcor PLC	1.239%	1.721%
BBY	Best Buy Co. Inc.	1.364%
BEN	Franklin Resources Inc.	1.334%
BXP	Boston Properties Inc.	0.940%	1.512%
C	Citigroup Inc.	1.081%	1.749%
CAG	Conagra Brands Inc.	1.438%	1.884%
CAH	Cardinal Health Inc.	1.781%	2.338%
CFG	Citizens Financial Group Inc.	1.338%
CLX	Clorox Co/The		1.512%
CMA	Comerica Incorporated	1.050%
CSCO	Cisco Systems Inc		1.738%
CVX	Chevron Corp	1.512%	2.027%
D	Dominion Energy Inc	0.947%
DLR	Digital Realty Trust Inc.	1.058%
DOW	Dow Inc.	1.249%	2.444%
DRI	Darden Restaurants Inc.	1.488%
DUK	Duke Energy Corporation	1.202%	1.603%
ED	Consolidated Edison Inc.	1.326%
EIX	Edison International	1.340%	2.110%
EMN	Eastman Chemical Co		1.382%
ETR	Entergy Corporation	1.344%	1.723%
EVRG	Evergy Inc.	1.211%	1.528%
FE	FirstEnergy Corp.	1.367%	2.007%
FRT	Federal Realty Investment Trust	1.318%	2.139%
GILD	Gilead Sciences Inc.	1.849%	3.077%
HAS	Hasbro Inc		1.120%
HBAN	Huntington Bancshares Incorporated	1.411%
HPE	Hewlett Packard Enterprise Co.	1.486%
IBM	International Business Machines Corporation	1.448%	2.435%
INTC	Intel Corporation	0.911%	1.252%
IP	International Paper Company	1.052%	1.732%
IPG	Interpublic Group of Companies Inc.	1.370%
IRM	Iron Mountain Inc.	1.448%	2.663%
IVZ	Invesco Ltd.	1.359%
KEY	KeyCorp	1.196%	1.969%
KHC	Kraft Heinz Company	1.316%	1.995%
KIM	Kimco Realty Corporation	1.274%	1.706%
KMB	Kimberly-Clark Corporation	1.298%	1.598%
KMI	Kinder Morgan Inc Class P	1.265%	2.928%
LNC	Lincoln National Corp	0.796%
LYB	LyondellBasell Industries NV	1.181%
MMM	3M Company	1.180%	1.964%
MO	Altria Group Inc	1.366%	3.240%
MS	Morgan Stanley	1.352%
NEM	Newmont Corporation	1.152%	1.519%
NRG	NRG Energy Inc.	1.135%	1.462%
NWL	Newell Brands Inc	0.828%
O	Realty Income Corporation	1.128%	1.762%
OGN	Organon & Co.	1.056%
OKE	ONEOK Inc.	1.389%
OMC	Omnicom Group Inc	1.377%	2.204%
PARA	Paramount Global Class B	0.900%
PEAK	Healthpeak Properties Inc.	1.196%	1.999%
PEG	Public Service Enterprise Group Inc	1.254%	1.506%
PFG	Principal Financial Group Inc.	1.751%
PM	Philip Morris International Inc.	1.336%	2.459%
PNC	PNC Financial Services Group Inc.	1.199%
PNW	Pinnacle West Capital Corporation	1.391%	2.328%
PPL	PPL Corporation	1.336%	2.236%
PRU	Prudential Financial Inc.	1.336%	2.379%
PSX	Phillips 66	1.499%
REG	Regency Centers Corporation	1.319%	1.989%
RF	Regions Financial Corporation	1.342%
SO	Southern Company	1.199%	1.618%
SPG	Simon Property Group Inc.	1.419%
STT	State Street Corporation	1.440%
STX	Seagate Technology Holdings PLC	0.890%
T	AT&T Inc.	1.305%	3.101%
TFC	Truist Financial Corporation	1.098%	1.615%
TROW	T. Rowe Price Group	1.268%
USB	U.S. Bancorp	1.147%	1.649%
VFC	V.F. Corporation	0.759%
VICI	VICI Properties Inc	1.280%	2.264%
VLO	Valero Energy Corporation	1.412%
VNO	Vornado Realty Trust	0.909%	2.228%
VTR	Ventas Inc.	1.095%
VTRS	Viatris Inc.	1.442%
VZ	Verizon Communications Inc.	1.048%	1.928%
WBA	Walgreens Boots Alliance Inc.	1.329%	2.405%
WHR	Whirlpool Corporation	1.088%
WMB	Williams Companies Inc.	1.278%	2.461%
XOM	Exxon Mobil Corporation	1.506%

Click to enlarge

SPYD (79 holdings) is more diversified than SPHD (50 holdings).

While there are 33 names (BBY, BEN, CFG, CMA, D, DLR, DRI, ED, HBAN, HPE, IPG, IVZ, LNC, LYB, MS, NWL, OGN, OKE, PARA, PFG, PNC, PSX, RF, SPG, STT, STX, TROW, VFC, VLO, VTR, VTRS, WHR, XOM) that are part of SPYD’s portfolio but not SPHD’s portfolio, there are only 4 names (CLX, CSCO, EMN, HAS) that are part of SPHD’s portfolio but not SPYD’s portfolio.

If we look at the sector allocation of SPYD vs SPHD, we can see some interesting divergences that explain the slight difference in performance between the two funds but mostly between the two funds to the S&P 500.

Why has SPHD performed by ~2.2% better YTD than SPYD?

Assuming that the current (sector) exposures (roughly) represent the exposures and differences (between the two funds) along the year, here are the main possible reasons for this outperformance:

1. ~10% more exposure to defensive sectors (Consumer Staples, Utilities) that have performed better (or less worse) this year.
2. ~4.4% less exposure to Consumer Discretionary (2nd-worst performing sector) that compensate for the ~2.5% lower exposure to Energy (best and only positively performing sector). The math is simple: SPHD saved a loss of ~1.5% on the former and gave up on a potential extra gain of ~1.2% (had it kept the same exposure as SPYD to both sectors throughout the year).
3. 12.2% more exposure to Financials (2nd-worst performing sector) that compensate for the 3.84% higher exposure to Real Estate (3rd-worst performing sector). Although the former is far from doing well this year, it’s performing better than the benchmark and therefore – a higher allocation to Financials (in-spite of losing money on it in absolute terms) has played out better in relative terms (compared to the S&P 500).

Dividends Provide A [H]edge

All in all, the dividend-oriented funds have performed significantly better than the benchmark – and not only in 2022.

Over the past year, SPYD (+2.4%) and SPHD (+5.6%) have outperformed SPY (-15.2%) by 19.2% on average.

Both funds are also trading closer to their all-time high (total return basis) than the benchmark.

Interestingly, they’re doing so (significant outperformance, smaller drawdown) in-spite of their volatility coming not too far below that of the benchmark.

While SPYD (30-day volatility of 23.23%) is only 2.4% lower than that of SPY (25.63%), SPHD’s volatility is 5.5% (or more than 1/5) lower than that of SPY.

We see that the dividend hedge isn’t a one-off in 2022, and the dividend edge may last longer than one year.

Most shocking (at least to me) is to realize that when we look at data going back to March 23, 2020 (when the markets bottomed following the COVID outbreak), the dividend-oriented ETFs are still coming ahead.

Having said that, we need to be careful drawing a conclusion regarding dividend growth being a better investing style at all times.

Not A One-Off, But…

The cushion (higher total return, lower volatility) allegedly provided by dividends during bad times isn’t guaranteed; neither when we use longer periods nor when we dig deeper into short(er) periods of high volatility.

If we examine the first three months of 2020 closer, we can see that the two dividend oriented ETFs delivered:

• Worse (than benchmark)/Worst (among peer group) total return.

• Worse (than benchmark)/Worst (among peer group) drawdown.

• Worse (than benchmark)/Worst (among peer group) volatility.

Moreover, when we look at longer periods, it’s hard (perhaps impossible) for income-oriented indices/securities to compete with growth-oriented indices/securities.

The longer the period – the greater the difficulty.

Although the S&P 500 High Dividend Index (SPXHD) is only about 7 years old (thus, we can’t stretch the below chart longer than that), the S&P 500 Index has outperformed the SPYD’s benchmark significantly since its inception.

Plant An Income Garden (Ahead Of 2023)

Regardless of the total return, earning an income out of the portfolio allows the investor to cover living costs and/or fund unexpected expenses without the need to sell positions under pressure.

For many years, it has been nearly impossible to earn a decent stream of income out of safe, short-term, solutions, ranging from 1 Year Treasury Rate to ETFs like PIMCO Enhanced Short Maturity Active ETF (MINT) or iShares 1-5 Year Investment Grade Corporate Bond ETF (IGSB).

Even if investors tried using more creative/risky solutions* – the yield was nowhere near sufficient during the vast majority of time.

*Ranging from stock ETFs (e.g. SPY, SPYD, SPHD) to long-duration/corporate/high-yield bond ETF (e.g. iShares 20+ Year Treasury Bond ETF (TLT), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD), iShares iBoxx $ High Yield Corporate Bond ETF (HYG).

Now, following the quickest tightening in history, things are normalizing, and yet – even now getting yields of 3%-4%, let alone higher than that, isn’t an easy task among traditional, relatively safe, solutions.

Looking at our Rose’s Income Portfolio (“RIG”), the TTM dividend yield is 5%.

SPY’s forward yield (based on the last quarterly distribution) is 1.57%, meaning that RIG is offering ~3.4% more yield than SPY.

Since its inception (Nov. 19, 2021), about 72% of RIG total return is attributed to income and only about 28% to price appreciation.

Of course, over the past year (+), since RIG’s inception, things weren’t that jolly in the capital markets – neither for stocks, nor for bonds – so there’s some distortion in the data in favor of the income component.

Nonetheless, there’s no distortion whatsoever when it comes to the level of risk taken by RIG compared to that of SPY.

Not only is RIG outperforming SPY by ~19.4% YTD (or ~23.3% since inception), but it’s also doing that while taking significantly lower risk.

How significant is that lower risk? About 40% less risk (Based on comparing the standard deviations of RIG/SPY = 0.94%/1.54%).

Whether it’s RIG, SPY, or any other instrument of choice – it’s important for investors to generate some sort of an income stream out of their portfolio.

That’s not only helpful in maintaining a healthier income/expenses ratio, but it’s also helpful in reducing the volatility of the portfolio over time.

Over the last couple of years, dividend- and value-oriented investments have outperformed price appreciation- and growth-oriented investments.

Looking at 2023, there’s no reason to assume that this trend is coming to an end.

If anything, we’re only at the early days of what might/should be a long-lasting trend.

And if that’s true for stocks – it surely is relevant for bonds too, likely more.