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One of the best things about investing is the passive income it can throw off. It takes work to initially make the money to invest, but once it’s invested in shares of companies or funds that pay dividends, a stream of unearned income will start to flow. Invest enough money for a long enough period of time, and that small stream can become a rushing river of passive income. Relatively equal monthly infusions of income from stocks or funds that pay each month are great for planning ahead.
When looking at ETFs that provide a monthly stream of passive income with low volatility, the Invesco S&P 500 High Dividend Low Volatility ETF (NYSEARCA:SPHD) would seem to fit the bill for investors. However, there are other options that provide a solid income stream with higher historical returns. Therefore, there are likely better options for your money.
SPHD Overview
Invesco has set up SPHD to track the S&P 500 Low Volatility High Dividend Index, and the fund has done a good job of tracking the index. The fund’s home page promises to invest at least 90% of its assets in stocks tied to this index. In that regard, it has achieved its goal.
The fund holds 51 different stocks. As of April 10, 2024, the fund has an allocation of about 20% in utility stocks, with nearly 16% in consumer staples, and 14% in real estate. The top 10 companies include tobacco giant Altria (MO), telecom giants AT&T (T) and Verizon (VZ), and industrial conglomerate 3M (MMM). These are stodgy old companies that are known more for the income they provide than growth. Information technology, which has been the highest-growth sector in recent years only makes up 4.83% of the fund’s holdings.
The fund has a management fee of 0.30%, which is quite a bit higher than Vanguard’s High Dividend Yield Index Fund ETF (VYM), which clocks in at 0.06%. The latter holds 454 companies in comparison to the 51 held by SPHD, and it does not attempt to limit volatility as much. Still, a 0.30% management fee is not horrible, as there are many funds that exceed 1%.
In limiting volatility, SPHD has done well over the past decade. Its share price has increased by a total of 45.17% over this time, an annualized return of 3.76%. Over the past five years, the EFT is basically flat with an appreciation of 0.39% total (not average) over that time. The S&P 500 (VOO) has returned nearly 80% over the same time, albeit with a lower dividend. Effectively, there has been little share price appreciation for investors in SPHD, yet it compares favorably with the index it is supposed to track, which has actually seen its price decline over the past five years.
S&P 500 Low Volatility High Dividend Index 5-year returns (Google Finance)
The tracking error for SPHD has exceeded that number for all ETFs over the past one, three, and five year periods, with an error that is 13.25% higher than that of the median ETF over the past five years.
Income
SPHD does provide a decent amount of dividend income. Its current yield is 4.37%, which lives up to the high dividend part of the fund’s name. The fund also pays out monthly. This yield compares well with VYM, which currently has a yield of 2.89%. It also crushes the S&P 500’s anemic yield of 1.36%, coming in at more than three times the amount of passive income per dollar invested. When adding the 4.37% yield to the returns over the past five years, the total return is about 5%; over the past 10 years, the number rises to a little over 8%. Not bad, but not great.
However, what it provides in current dividend income, it gives up in dividend growth. Investing in the companies listed above does not provide rapid growth in revenue and income numbers, and those companies like T and VZ have very low dividend growth numbers in recent years as a result. As a whole, SPHD has only grown its dividend by 2.56% over the past five years although that number rises to 6.34% over the past decade. Over the past five years, the average dividend growth has failed to keep up with inflation. Those relying on the fund for a large amount of their income would have actually seen their purchasing power decrease with little price appreciation to show for their efforts.
Comparison
There are likely better options for investors wanting a strong stream of income. There might be some more volatility, but there is likely to be more price appreciation if past performance is any indicator. One such fund is the Schwab US Dividend Equity ETF (SCHD), which is a very popular fund among income investors. This fund has a 0.06% management fee and a current yield of 3.42%. While this is a little more than 1% lower than the yield of SPHD, it is still well above the yield of the market as a whole.
Additionally, SCHD has had much higher returns over the past decade. Instead of returning a share price appreciation of 45.17% over the past 10 years, SCHD has increased by 110% over the same time, a compounded annual growth rate of 7.65%. When adding that number to the 3.42% yield, this provides a total return of a bit more than 11%. Additionally, SCHD has had an annualized dividend growth rate of 11.80% over the past five years, although the most recent year’s increase was only 1.22%.
Even the Global X NASDAQ 100 Covered Call ETF (QYLD), which is a controversial holding for many people has had a stronger overall return than SPHD. The fund has lost an average of 3.11% per year in terms of share price, but when combined with the current yield of 11.54%, that would provide an estimated total return of nearly 8.5%, which is higher than that of SPHD. Like SPHD, QYLD is a monthly dividend payer, so it is an option for those looking for a monthly infusion of cash.
Ironically, the annualized volatility numbers for both SCHD and QYLD are lower than that exhibited by SPHD, which is supposed to be a low volatility fund.
Conclusion
SPHD achieves what it claims to have as its goal. It has exhibited relatively low volatility in its share price. Indeed, over the past five years, the price per share has barely budged, returning less than 1% overall (not CAGR) over that period of time. SPHD also provides solid dividend income with a current dividend yield of more than 4%. However, when it comes to total return, there are other options that have performed much better, even in the high-yield space.
