Is the SPDR Portfolio S&P 500 High Dividend ETF the Best Dividend ETF for You?

The top reason anyone might be interested in the SPDR Portfolio S&P 500 High Dividend ETF (SPYD 0.85%) is clear. It's first and foremost a dividend payer. The fund's current dividend yield stands at a healthy 4.6%. For the sake of comparison, the S&P 500's average dividend yield right now is a much more modest 1.35%. Income-seeking investors could certainly do worse than stepping into this exchange-traded fund.

Buying a stake in this ETF for its solid yield, however, isn't necessarily the best move for you. As is the case with any investment, there are trade-offs and downsides to owning this one. Some people might be better off not owning a stake in the SPDR Portfolio S&P 500 High Dividend ETF and selecting another high-yielding choice instead.

Looking at the SPDR Portfolio S&P 500 High Dividend ETF

Just as the name suggests, this fund delivers respectable dividend payments right out of the gate to newcomers. The aforementioned yield of 4.6% is about as much yield as you're going to find from any investment in stocks, which of course also offers you a chance of capital appreciation.

But how does this exchange-traded fund do it? It's built to mirror the S&P 500 High Dividend Index, which is a collection of the 80 highest-yielding names among the S&P 500's constituents.

Although its very biggest holdings are usually stocks of conventional companies like waste management outfit Public Service Enterprise or banking name Citigroup, its single-biggest category of holdings is typically real estate investment trusts (REITs). Roughly one-fourth of this fund's value consists of real estate holdings, in fact. REITs are of course well suited as dividend-paying investments, since they own rent-bearing real estate. Financial stocks and utility stocks -- great dividend-paying businesses in their own right -- also make up a significant piece of the ETF's portfolio.

This portfolio is always changing, of course. The underlying index is rebalanced on a quarterly basis, sometimes pushing a particular stock (or stocks) out of the fund and replacing them with new higher-yielding holdings. These changes can in turn slightly alter this exchange-traded fund's sector exposure. But, these constant updates are how the fund's dividend yield is so strong at any given time.

Reasons to own the SPDR Portfolio S&P 500 High Dividend ETF

The top reason the SPDR Portfolio S&P 500 High Dividend ETF might be a good fit for your portfolio is that the dividend is high.

As was noted, although you can find higher-yielding options, these alternatives are more likely to be based on bonds, or built around higher-risk stocks that may or may not be able to sustain their dividend payments. Those higher-risk stocks might also be far more volatile than the blue chip names you'll find within the S&P 500 High Dividend Index, making them tougher for some investors to stick with. And as for bonds, they don't offer any prospect of capital appreciation. Bonds only pay interest, and then return your initial amount of investment capital to you once they mature.

Also know that the SPDR Portfolio S&P 500 High Dividend ETF's dividend growth is above average, at least outpacing inflation. The $1.81 per share the fund dished out in the form of dividends over the past 12 months is better than the comparable $1.61 from five years back, and 40% better than the sort of dividends the ETF was paying per year a decade ago ($1.26). That's not enormous growth, but given the circumstances of the past 10 years, that's decent given that you're starting out with an above-average yield.

The kicker: Not that it should be a huge concern, but to the extent it matters, this fund's expense ratio is a mere 0.07% of its value. Lower expenses mean the ETF's total performance more closely keeps up with the underlying index's performance, ultimately meaning better returns for you. These nickels and dimes do add up over time.

Reasons not to own this high-dividend exchange-traded fund

There are plenty of good reasons to own other income-oriented investments than this one, however. Chief among its downsides is that its historical capital appreciation is low -- like, really low. The fund's price has only grown 34% since its inception in 2015, versus the S&P 500's 155% advance for the same time frame. This gain doesn't consider dividends paid in the meantime, but even if it did an investor's total return on this ETF would be subpar.

What gives? These are some of the market's most familiar blue chip stocks, after all. These tepid returns may be the result of the index's inclusion strategy itself.

See, the rules-based S&P 500 High Dividend Index requires a great deal of buying and selling every three months. The premise makes sense on the surface. Just bear in mind, however, that a high dividend can often be high simply because the underlying stock is falling out of favor for good reason ... like maybe an impending dividend cut. Conversely, a dividend yield can be low specifically because a great company's stock is in demand for good reason, and the market's willing to pay a premium price for it.

Said more directly, the index's single-criteria algorithm may mean it's constantly shedding some of the market's best (and best-performing) stocks while adding its weakest ones poised for prolonged poor performance.

And this exchange-traded fund's turnover can be high. In its most recently reported prospectus, the SPDR Portfolio S&P 500 High Dividend ETF's turnover was a hefty 46%, meaning nearly half its holdings were swapped out for other stocks during that 12-month stretch. This figure is above its recent average, but this index has always imposed above-average turnover on its owners.

It's not necessarily the end of the world. It can be a big deal, though, for one simple reason. That is, all this buying and selling are taxable events passed along to the fund's investors. If you're holding this exchange-traded fund in a tax-sheltered IRA, it doesn't matter -- it's still not taxable for you. If you hold this dividend-paying ETF in a taxable brokerage account where you can readily access the income it generates though, you may be on the hook for a bigger tax bill than you were counting on.

Just think it through

None of this is to suggest the SPDR Portfolio S&P 500 High Dividend ETF isn't worth owning. It serves its purpose well for a certain kind of investor. Namely, anyone seeking above-average yields right now can plug into this fund and get exactly that. If you're looking for dividend income within an IRA that doesn't need a ton of growth, so much the better.

If instead, you're looking to generate good and growing income and also achieve some investment growth in a taxable account, you may be better served by something else.