Invesco’s SPHD Pays 4.57% While the S&P 500 Pays 0.98%, And It Is Up This Year Without the Tech Bubble Risk

The post Invesco’s SPHD Pays 4.57% While the S&P 500 Pays 0.98%, And It Is Up This Year Without the Tech Bubble Risk appeared first on 24/7 Wall St..

Due to the attention given to their trillion dollar market caps and preoccupation with A.I., the Magnificent 7 stocks (Apple, Amazon, Alphabet/Google, Meta Platforms/Facebook, Nvidia, Microsoft, and Tesla) often make people forget that there are 493 other stocks in the S&P 500 worth investors’ consideration. 

Case in point: investors seeking a combination of income and growth need not avoid S&P 500 ETF exposure. At the time of this writing, State Street SPDR S&P 500 ETF Trust (NYSE: SPY), which is one of the leading straight S&P 500 ETFs in the market, is posting a +7.47% YTD return, with a +20.46% 1-year gain and a 0.98% yield. In comparison, the Invesco S&P 500 High Dividend Low Volatility ETF (NYSE: SPHD), an ETF that draws upon different stocks from the index apart from the Magnificent 7, boasts a +10.45% YTD return, a +14.74% 1-year return, and a 4.57% yield. 

The S&P 500 Of 30 Years Ago

SPHD’s focus on dividends and lack of Magnificent 7 inclusion is reminiscent of the S&P 500 in the mid 1990s.

When looking at the top holdings of SPHD, it resembles an S&P 500 time capsule from 30 years ago, an era when Frasier and The X-Files were TV favorites, The Fugees and Spice Girls were ubiquitous on the radio, people still bought compact discs, and Michael Jordan led the Chicago Bulls to their fourth NBA title. Among SPHD’s top holdings are:

• Verizon Communications: 3.47%
• Altria Group: 3.443%
• Pfizer Inc.: 2.97%

As one might deduce from its official name, SPHD selects the 75 highest yielding stocks from the S&P 500, weighting them by yield in descending order. A subsequent 12-month volatility analysis reduces the list of 75 to the 50 stocks with the lowest volatility. Inevitably, the sectors that tend to generate dividends, i.e, real estate, utilities, financials, and consumer staples, tend to wind up getting greater representation in SPHD. The cumulative dividends are passed through and prorated to shareholders. SPHD made its market debut on 10-18-2012. A detailed  overview includes the following:

Gains vs. Income and Other Caveats

Choosing strong growth ETF or a growth & income ETF is a choice than many investors facing retirement in the near future is a major decision.

Of course, the tech bubble perception and spreading concerns about overvaluation of A.I. is a very valid one, as Magnificent 7 avoidance is a major factor driving foreign investors away from the tech sector and towards other ones in their own domestic markets. US investors who share those sentiments (such as investor Michael Burry of “Long Short” fame), but who still want major US market upside may find SPHD of interest. 

However when measuring over the extended term, SPY unequivocally outpaces SPHD, primarily due to the horsepower of the technology stocks, mostly dominated by the Magnificent 7. While the rest of the S&P 500 stocks continue to grow at their respective paces, the overall S&P 500 index owes its consistent annual double-digit return performance and triple point return long haul performance from those leading tech stocks in the index. Nevertheless, SPHD has continued to offer solid, albeit less spectacular gains, and has unflaggingly never missed a monthly dividend payment since its inception. 

That dividend, though, is subject to interest rate fluctuations. If rates are cut, dividends may take a small reduction, but the stocks and SPHD’s NAV will get a boost. Alternatively, rising rates may make dividends larger, but SPHD will take a commensurate NAV drop. 

The other main consideration is how much money SPHD will leave on the table vs. SPY in capital gains if the market takes another strong bull run. A Federal Reserve Bank interest rate cut announcement will cause SPY to boom. SPHD will rise also, but its gap with SPY will likely widen as well, as the tech stocks will probably be leading the charge. 

Allocating some of one’s portfolio to SPHD makes sense for investors seeking some income with their growth, with the income as a defensive hedge against a market downturn or volatility fears. However, this defensive posture might not be a long term hold scenario, so portfolio monitoring is a prudent practice to follow if one does buy SPHD. 

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