Stocks with a strong dividend history have become so desirable in investing that even Bill Gross, the “Bond King” head of PIMCO, is recommending equities such as Procter & Gamble (NYSE:PG) and The Southern Co. (NYSE:SO) for the income feature. For investors, traders and speculators seeking to profit from the income element of an equity, the SPDR S&P Dividend (NYSE:SDY) exchange-traded fund offers significant advantages over a single stock.
The SPDR S&P Dividend ETF tracks the S&P High Yield Dividend Aristocrats Index, comprised of the 50 highest-yielding dividend stocks that have increased payouts in each of the past 25 years. This includes companies of all sizes, as the emphasis on yield allows for many small-cap stocks to be included in the ETF. With more than $8 billion in assets, the SDY yields 3.2% and provided total returns of 9.8% in 2011.
Exchange-traded funds are ideal vehicles for speculators, traders and investors alike. Like a stock, an ETF has movement and pricing patterns. By the very nature of an ETF, the volatility is lower than the market as a whole — the SDY has a beta of 0.87 — but while not as volatile as the average stock, it does fluctuate. For the past 52 weeks, SDY’s price range has been $44.90 to $54.83. Speculators can buy and sell for profits based on mean reversion trading.
The dividend feature allows for capture-the-dividend trading. This can be very profitable and exposes an investor’s capital for only four very short periods a year when the security goes ex-dividend, as detailed in a previous article. Capture-the-dividend trading allows for the individual to have the “perfect trading day,” with all positions closed when the bell rings.
For investors, the price movements of the SDY should be monitored to buy at the most desirable level. If a certain income yield is the target, then patiently wait for the dips. At the low for the past 52 weeks, SDY’s dividend yield would have been around 4%. The average yield for an S&P 500 is around 2%. And the investor would enjoy not only twice the return of the S&P average, but greater diversity than owning just a single stock — and at a much lower cost than trying to buy and sell 50 different equities to replicate SDY’s holdings.
As of this writing, Jonathan Yates did not hold a position in any of the aforementioned securities.