The S&P 500 Trades at 25x Earnings. This Dividend ETF Is Beating It With Stocks Trading at Much Lower Valuations
A simple dividend ETF built from the S&P 500 is quietly outpacing the broader index this year, and the reason has less to do with yield than with where value stocks have been hiding in plain sight.
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Starting valuations have historically been one of the more useful predictors of long-term stock returns. Personally, I prefer measures such as free cash flow yield because earnings can be influenced by plenty of accounting adjustments, exclusions, depreciation policies, and other moving parts. Still, the price-to-earnings (P/E) ratio remains a useful yardstick for quickly assessing how much investors are paying for corporate profits.
Right now, the S&P 500 trades at roughly 25 times earnings. That’s not necessarily outrageously expensive, but it’s certainly not cheap either. Fortunately, getting broad exposure to the index remains inexpensive. The State Street SPDR Portfolio S&P 500 ETF (SPYM) charges just a 0.02% expense ratio. But according to Testfolio, SPYM had returned 12.34% cumulatively year to date through Sept. 1, while the State Street SPDR Portfolio S&P 500 High Dividend ETF (SPYD) returned 17.03%.
That dynamic fits with the broader resurgence in large-cap value stocks we’ve seen this year. SPYD is technically a high-dividend ETF, but its methodology also functions as a fairly straightforward value screen. Here’s why I like this ETF as a contrarian pick.
How SPYD Finds High-Yield Stocks
SPYD tracks the S&P 500 High Dividend Index, which starts with an already well-established universe: the S&P 500. That means its potential holdings have already passed the index’s requirements surrounding market capitalization, liquidity, and positive earnings. From there, the methodology is remarkably simple. It identifies the 80 S&P 500 constituents with the highest dividend yields and builds its portfolio from those stocks, with quarterly rebalancing.
A high-dividend screen naturally captures some characteristics associated with value investing. Dividend yield is calculated by comparing a company’s annual dividend with its share price. Assuming the dividend remains constant, a falling share price mechanically increases the yield.
That means high-yield screens frequently gravitate toward companies trading at depressed valuations. Some may simply be mature, cash-generating businesses that investors have overlooked. Others may be facing legitimate problems, which creates the classic risk of a dividend yield trap if earnings deteriorate and management eventually cuts the payout. SPYD accepts that risk rather than applying a complicated quality overlay. In exchange, investors get a very inexpensive portfolio. The ETF charges a 0.07% expense ratio and currently offers a 4.28% 30-day SEC yield.
One drawback is tax efficiency. Unlike some dividend ETFs, SPYD doesn’t exclude real estate investment trusts (REITs). In fact, real estate is currently its largest sector allocation at 24.26%. REIT distributions frequently include income that doesn’t qualify for the lower qualified-dividend tax rates, making SPYD potentially less tax efficient in a taxable brokerage account than dividend strategies that specifically exclude them.
How Much Value Exposure Does SPYD Provide?
The valuation difference between SPYD and the broader market is considerable. According to State Street, SPYD’s portfolio currently trades at a P/E ratio of 17.06. Put simply, investors are paying an average of roughly $17.06 for every $1 of earnings generated by the companies in the portfolio. Compare that with approximately $25 for every $1 of earnings from the S&P 500. SPYD therefore provides exposure to large-cap U.S. stocks at a substantially lower earnings multiple while simultaneously producing a much higher dividend yield.
That valuation gap helps explain why SPYD has performed so well during this year’s rotation toward value. Whether the outperformance continues will depend heavily on whether that rotation has further to run. Historically, SPYD has experienced long stretches of underperformance when growth stocks were leading the market, and a high yield alone doesn’t guarantee superior total returns.
For investors looking to make a contrarian value bet, however, I think SPYD has a lot going for it. You’re paying only 0.07% annually, getting a 4.28% SEC yield, and buying an S&P 500-derived portfolio at a much lower valuation than the broader index. There are also no derivative overlays, leverage, or complicated income gimmicks involved. SPYD simply owns 80 of the highest-yielding stocks in the S&P 500. If value stocks continue their winning streak, that’s a straightforward way to participate.
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Tony Dong is the founder of ETF Portfolio Blueprint. He also serves as Lead ETF Analyst for ETF Central, a partnership between Trackinsight and the NYSE.
Tony’s work focuses on ETF strategy, portfolio construction, and risk management, with an emphasis on making complex investment concepts accessible to everyday investors. His insights and analysis have also appeared in U.S. News & World Report, Kiplinger, MoneySense, and The Motley Fool.
Tony holds a Master of Science degree in enterprise risk management from Columbia University and the Certified ETF Advisor (CETF) designation from The ETF Institute.
