How To Find Dividend Stocks In An ETF And As A Stockpicker

Last week in The Juice, we focused a bit on dividend stocks and ETFs. Given the Fed’s decision to lower interest rates — and with more cuts coming — we think owning dividend payers makes sense as investors shift their quest for income. 

In case you missed them, these installments nicely lead into today’s where we help you screen for great dividend stocks and expand on a high-yielding dividend ETF that might just be worth your time. 

A Dividend Investing Strategy To Consider For Lower Interest Rates

The Difference Between Dividend ETFs As Investors Seek Income

That high-yielding dividend ETF we speak of shows up as the most-searched large cap value ETF in our Trackstar database, which measures investor search interest across the platforms of our 100+ financial media partners. 

The SPDR Portfolio S&P 500 High Dividend ETF (SPYD)

To screen for stocks of any kind, The Juice likes to use FinViz. So that’s exactly what we did to search for solid dividend payers.

First, we looked at how SPYD selects the stocks that comprise the ETF. This is fun to do, especially if you’re a market geek. All you have to do is find the methodology, which, for SPYD, you can find here. Digging deep inside ETFs is a great way to amp up your investing knowledge and understanding of stocks. The Juice is more than happy to help facilitate the process. 

You’ll see that this methodology is for the S&P 500 High Dividend Index. Makes sense because SPYD is a smart-beta ETF, which, as The Juice explained in May is, as one example, a passive ETF that tracks an actively-constructed index. 

In this case, the S&P 500 High Dividend Index uses the S&P 500 as its universe, then ranks the dividend payers based on dividend yield. It, and subsequently SPYD, settles on the 80 highest-yielding names from that screen. You can access SPYD’s holdings here.

We’ll tell you right now. We would buy this ETF after assuming solid positions (that we regularly add to) in SPY, QQQ and the Schwab US Dividend Equity ETF (SCHD). All names we reference and recommend frequently in The Juice.

SPYD yields nearly 4.2%, has a super low expense ratio of 0.07% and has generated a return of roughly 27% over the last year. It literally has the best of three worlds for dividend investors: high yield, low expenses and solid returns. 

We think SPYD does so well because, by narrowing the field to the S&P 500, it avoids chasing yield. Put another way, SPYD owns quality companies that happen to pay above-average yields. And the S&P 500 is a quality index that happens to own a few otherwise solid companies going through hard times amid a pack of strong perennial performers. 

Think Ford (F), which makes up nearly 1% of SPYD, but is the second-to-last holding in terms of proportion. So you get appropriate exposure to a company such as Ford with more solid names like IBM (IBM), Hasbro (HAS) and Public Storage (PSA) showing up in the top ten. 

If you’re looking to add a dividend ETF to your portfolio, The Juice thinks you should buy SPYD, especially as we enter a relatively low-interest rate environment. 

If you want to buy individual stocks for greater and more specific exposure, we suggest starting with SPYD and screening to find SPYD holdings that meet additional criteria, which is what we did in FinViz.

We used the following metrics in our screen: 

Payout ratio. Payout ratio refers to how much in dividends a company pays relative to its net income (dividend divided by net income, multiplied by 100 to get a percentage). 

If a company earns $50 million in a year and pays $25 million to shareholders via dividends, its payout ratio is 50%. Is this good or bad? It sort of depends. 

Generally, the higher the payout ratio, the more concerned you should be. If that $50 million a year company pays $45 million in dividends, it has a payout ratio of 90%. It’s probably safe (we can use that word here!) to say that’s never a good situation. Or, at the very least, it’s not a sustainable situation. 

A 50% payout ratio, however, might be perfectly fine for one company, but not great for another.

We set our filter to include companies with payout ratios under 50%. 

Dividend Yield. As a refresher, dividend yield tells you how much a company pays out in dividends relative to its stock price (dividend divided by stock price, multiplied by 100 to get a percentage). 

For example, if a stock trades for $100 and pays a $1 annual dividend, its dividend yield is 1%. 

A high yield means more income. If you own 100 shares of that $100 stock that yields 1%, you can expect to receive $100 in annual income (all else, such dividend reinvestment, equal). Of course, as a stock price fluctuates, so will its dividend yield. Holding the annual dividend constant, as the share price decreases, dividend yield increases. The inverse holds true. Therefore, a high yield can be — and often is — the function of a falling stock price.

We set our filter to include stocks with dividend yields of 2.0% or higher. 

After we ran this screen, we came up with our favorite SPYD stocks that we would buy individually to gain even more exposure to stocks that not only pay high yields, but offer potential for share price appreciation going forward. 

These are The Juice’s four favorite dividend stocks from SPYD that we would buy now:

We’ll provide more color around why we like these stocks in a future Juice. Of course, we could use a screen to find high yielders that SPYD doesn’t own, either because they’re not part of the S&P 500 or because our filters brought up other names. 

The Bottom Line: Ultimately, we would just buy SPYD and keep our individual stock buying to big tech names and dividend payers with super long dividend increase streaks. When trying to get at specific parts of the market, ETFs tend to work best for long-term investors seeking portfolio diversification. 

That said, we understand that stock picking is fun and potentially profitable. It’s also a lot of fun to uncover names that don’t always make the headlines, such as, for example, the regional banks on our list. It’s the best time ever to dig into an ETF, see how it selects stocks and then attempt to filter out opportunities within an ETF’s larger holding list. 

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