Global X SuperDividend U.S. ETF(NYSEMKT: DIV) and SPDR Portfolio S&P 500 High Dividend ETF(NYSEMKT: SPYD) both have a similar goal of buying high-yield stocks. However, they go about the effort in a slightly different way.
Is SPDR Portfolio S&P 500 High Dividend ETF's 4.1% yield a better bet than Global X SuperDividend U.S. ETF's 5.4% yield?
What does SPDR Portfolio S&P 500 Dividend ETF do?
SPDR Portfolio S&P 500 High Dividend ETF is incredibly simple to understand. It starts by looking at only the dividend-paying stocks within the S&P 500(SNPINDEX: ^GSPC), which is a curated list of generally large companies meant to represent the broader U.S. economy. The dividend payers are lined up by dividend yield, from highest to lowest.
The 80 highest-yielding stocks get put into the ETF using an equal-weighting methodology, so that each stock has the same impact on overall performance. Aside from the equal-weighting bit, this is a pretty straightforward approach.
Image source: Getty Images.
What does Global X SuperDividend U.S. ETF do?
Global X SuperDividend U.S. ETF is a lot more complicated. It starts its screening by looking at beta, a measure of volatility relative to the broader market. A beta above 1 suggests the stock is more volatile than the market, while a beta below 1 suggests it is less volatile. Global X SuperDividend U.S. ETF only selects from stocks with betas equal to or less than 0.85. The next pass is to eliminate stocks with dividend yields below 1% or above 20%.
After that, the remaining stocks are checked to ensure that they have paid dividends for at least the last two years, and that the current dividend is at least equal to 50% of the previous year's dividend. This last one is interesting because it allows for companies that have cut their dividends to stay in the mix. From this final list, the 50 stocks with the highest dividend yields are selected. Like SPDR Portfolio S&P 500 High Dividend ETF, an equal-weighting methodology is applied.
Image source: Getty Images.
Beta versus the S&P 500 index... and equal weighting
Picking stocks using only a high yield as the determining factor is a risky approach to investing. The list of highest-yielding stocks will inherently include companies that are facing material problems and are, thus, out of favor on Wall Street for a good reason. So, both SPDR Portfolio S&P 500 High Dividend ETF and Global X SuperDividend U.S. ETF have taken steps to help reduce risk.
SPDR Portfolio S&P 500 High Dividend ETF is relying on the selection criteria of the S&P 500 index. The 500 or so stocks in the index are selected by a committee because they are large and economically important. That will, inherently, weed out less desirable companies over time.
Global X SuperDividend U.S. ETF uses beta, specifically attempting to find lower-volatility stocks. Eliminating yields over 20%, meanwhile, takes out the most outlandish yield situations that would likely require deep analysis to get a handle on.
The use of equal weighting by both of these exchange-traded funds (ETFs), meanwhile, effectively caps the damage any single stock can do to the performance of the overall portfolio. That said, it also places a limit on how much benefit is derived from any single investment. All in, however, risk control is an important aspect of both of these ETFs.
Beta appears to be a limiting factor
As the chart highlights, over time, Global X SuperDividend U.S. ETF has lagged behind SPDR Portfolio S&P 500 High Dividend ETF on a total return basis. Total return includes the reinvestment of dividends, so the graph basically takes into account the notable yield difference between the two ETFs.
This chart is even more telling, however. It shows the price-only return with the total return. Essentially, the price-only return is what an investor who used the dividends to pay for living expenses would have seen. And the numbers are pretty bad for Global X SuperDividend U.S. ETF, which has lost about 25% of its value over the past decade.
SPDR Portfolio S&P 500 High Dividend ETF increased in value by about 45%. That's a massive 70-percentage point difference!
One last chart showing the actual dividend payments each of these ETFs spit out will be informative. SPDR Portfolio S&P 500 High Dividend ETF's dividend is more volatile on a quarterly basis, but notice that it has trended above the dividend paid by Global X SuperDividend U.S. ETF. Global X SuperDividend U.S. ETF's dividend, meanwhile, has trended lower over time.
This actually makes complete sense. With a growing asset base, SPDR Portfolio S&P 500 High Dividend ETF has more capital that allows it to produce more dividends. With a shrinking capital base, Global X SuperDividend U.S. ETF has less capital and, thus, less ability to generate dividends.
There's a pretty clear winner for dividend investors
If you are reinvesting your dividends or using them to pay for living expenses, SPDR Portfolio S&P 500 High Dividend ETF looks like a better long-term selection than Global X SuperDividend U.S. ETF. Simply put, adding beta into the mix has, so far anyway, proven too large a drag on performance to justify adding Global X SuperDividend U.S. ETF to an income portfolio.
This is unless, of course, you are specifically looking to limit near-term volatility during a period of market uncertainty. Such a tactic, however, is really just a short-term approach. If you are a buy-and-hold investor, SPDR Portfolio S&P 500 High Dividend ETF looks like the winner here.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
