SPYD Could Be An Investment Dave Ramsey Might Approve

The SPDR® Portfolio S&P 500 High Dividend ETF (NYSEARCA:SPYD) is an exchange-traded fund designed to invest in the highest dividend yielding companies within the S&P 500 index. The ETF seeks to track the performance of the S&P 500 High Dividend Index, which includes about 79 of the highest dividend yielding companies within the S&P 500. SPYD is an ideal investment for those desiring higher dividend yields than the broader market for income aims, as well as for those who believe high dividend yielding companies have the potential for growing profits. It also meets some of the criteria that would fit into a financial plan that could be approved by Dave Ramsey. This is true even if the market takes a short-term tumble, which may be a worry for many investors.

Valuation

From the fund's factsheet, you may be surprised to learn that the Price/Earnings ratio for this fund is just 12.24 and the estimated 3-5 Year EPS growth rate is a healthy 4.39%. Compare this to the broader index with a P/E ratio of about 18.78.

If the market takes a tumble, these stocks underlying this index won't tumble far, as they are already good bargains.

Diversification

SPDR® Portfolio S&P 500 High Dividend ETF offers a diversified investment methodology for investors looking for a balanced mixture of high dividend yields and broad exposure to the U.S. stock market. Some of the stocks included in the ETF include: Darden Restaurants Inc, Omnicom Group Inc, Southern Co, The Interpublic Group of Companies Inc, Iron Mountain Inc, Pinnacle West Capital Corp, Kimberly-Clark Corp, NRG Energy Inc, Public Service Enterprise Group Inc, and AvalonBay Communities Inc, along with about 70 other investments. The fund's low expense ratio, just 0.07%, also makes it an attractive option for investors looking for the most cost-effective investments.

Having a broad diversified investment portfolio and ultra-low expenses put it into the category of a Dave Ramsey approved investment. Dave Ramsey is a financial expert, radio host, author, and motivational speaker known for his no-nonsense approach to helping people with money management. He strongly advocates for the concept of living within one's means, budgeting and avoiding debt. Once those pillars of financial wisdom are achieved, he also teaches to build wealth through smart investing. Over the years, Ramsey has helped millions of everyday people get out of debt and achieve financial freedom, reaching them through his radio show, books, and educational programs.

To be perfectly honest, many do-it-yourself stock investors and gurus dislike Ramsey. I was one of those folks, up until recently. The main reason is that he tells people not to buy individual stocks and to pay off debt, even if some of that debt could have low interest rates. This flies in the face of traditional financial thinking taught in business schools. Once you realize this is a psychological approach and not a theoretical finance approach, you can come to grips with why this works for almost everyone.

As I said, Ramsey believes that purchasing individual stocks is too risky for the average person. Instead, he recommends investing in index exchange-traded funds, also known as ETFs, and index mutual funds. Index ETFs are a type of investment that tracks an index, such as the S&P 500, and allows investors to diversify their portfolio without having to buy individual stocks, and trade in and out of securities. Index mutual funds are similar in concept, but structured as a mutual fund.

Ramsey also believes that index ETFs are great because they are a low-cost investment option. They have lower expenses compared to actively managed mutual funds, which can eat into an investor's returns over time. Additionally, ETFs allow investors to invest in a wide range of assets, such as stocks, bonds, and commodities, giving them diversification and exposure to multiple markets.

Overall, Dave Ramsey recommends ETFs and index mutuals funds as a way for investors to build wealth over time while minimizing their downside risk. By investing in a diversified portfolio of ETFs with a long-term mindset, investors can potentially earn higher returns, maintain their principal, and achieve their long-term financial goals.

Investors in SPDR® Portfolio S&P 500 High Dividend ETF (SPYD) can find five main benefits to buying this ETF over individual stocks and actively managed mutual funds.

1. Predictable income: SPYD provides investors with regular income and a healthy dividend yield through consistent dividend payments. This creates a highly predictable income stream.

Why does this matter?

The main benefit of a predictable dividend income stream is the consistency it provides for investors. By receiving regular periodic payments, those investors can better plan for future re-investment and personal expenses. Predictable dividend income can also help mitigate the impact of volatility in the stock market, as investors can rely on the steady income stream regardless of market fluctuations. Unless dividends fall significantly, many investors will continue to hold through periods of volatility and companies that offer consistent dividend payments often have a strong track record of financial stability and growth. Investors like that perceived strength. Overall, predictable dividend income can be a valuable tool for investors seeking a reliable source of cash flow and a stable investment strategy.

2. Diversification: SPYD holds a diversified group of dividend-paying equities across various industries, reducing the investors' exposure to individual stock risks and market volatility.

Diversification is an essential investment strategy that helps reduce risk and minimize losses. By dispersing this investment across about 80 stocks, the investor gains exposure to various industries, asset types, and geographical locations, diversification ensures that an investor's portfolio will not be wiped out by a single economic event, market downturn, or company failure. That being said, this ETF has 53.12% of its holdings in just three sectors, real estate 21.94%, financials 17.14%, and utilities 14.04%. Be warned that a commercial real estate crisis that affects banks may also adversely affect this ETF, but you can bet that it would likely recover, given time.

3. Low-cost: Compared to traditional mutual funds or individual stock investments, this ETF has a super low fee of 0.07%. This puts more money in the investor’s pocket by reducing the cost of investing, improving possible returns.

The SEC has some interesting information on investment fees and how they can eat away at total return.

4. Long-term growth potential: S&P 500 dividend-paying companies are often established and profitable, but also provide an opportunity for long-term capital appreciation along with those regular dividend payments. Equity ETFs, including high dividend payers, offer long-term growth potential anchored on the performance of the underlying stocks. In a broadly diversified ETF like this one, the ETF growth potential is fueled by a rising global population and an expanding economy, translating to higher demand for goods and services, thus driving equity valuations higher.

Leaving your money in one investment, yielding dividends that can be reinvested will help charge your portfolio with power compound interest. Dave Ramsey and other experts agree that compound interest is the most powerful force in investing.

Compound interest is the interest earned on both the principal balance and the total interest accrued. This means that as interest (or a dividend) is added to the original investment, the interest earned in the following periods will increase. Over time, this compounding effect can significantly increase the total amount earned on an investment.

The frequency of compounding can vary depending on the investment. For example, a savings account may compound interest monthly, whereas a bond may compound annually. This frequency can impact the total amount earned since more frequent compounding results in a higher overall return. For an investment like SPDR® Portfolio S&P 500 High Dividend ETF, dividends are paid quarterly and you can reinvest this cash as it is received each quarter to grow your wealth.

Compound interest can be a useful investment tool for long-term growth. By starting an investment early and allowing it to compound over time, individuals can potentially earn a greater return than if they had invested a lump sum later on. However, it is important to consider the compounding frequency and any investment fees to maximize the benefits of compound interest. The SPDR® Portfolio S&P 500 High Dividend ETF pays a quarterly dividend but also has significantly lower fees at 0.07% than may alternatives.

As you can see here, the total return for the past ten years of this investment has been 68.74% when you include the dividends paid. Compare this to the SPY SPDR® S&P 500 Trust ETF (SPY) and you can see that the SPYD lags behind in total return. For this reason, I wouldn’t recommend making SPYD your only core holding, as some of the non-dividend paying stocks of the S&P 500 may outperform in total performance. SPYD could be used if an investor wants to get a boost to their overall dividend yield, when investing in something like SPY. The yield on SPY is 1.56% currently.

Here's a rough calculation with rounded numbers showing how an investor might use a higher dividend yielding investment like SPYD to boost their overall portfolio yield to a desired target. For instance, an investor may want a core position in SPY, but want at least a 2% dividend yield. In this case, they could put 15% of their holdings into SPYD. And if they wanted about 3.5%, they would need the split to be 60/40 between SPYD and SPY.

Take the Boring Approach to Success!

Taking this approach to ETF investing can undoubtedly be considered a rather boring undertaking. The basic principle of a passive investment strategy is to mirror the performance of a particular group of stocks, such as the S&P 500. There’s simply no excitement or rush associated with trying to find and potentially succeed in picking winning stocks in the market. That’s perfectly fine! While it may not be exciting, it is an extremely reliable and low-cost way to achieve long-term investment goals.

This boring approach using an ETF like SPYD will reap long-term gains for an investor. This ETF meets all the requirements to be included in a safe investment plan that beats the market.