Sensing a Market Top? Seek this Stock for Downside Protection: SPDR S&P Dividend (ETF) (SDY), SPDR S&P 500 ETF Trust (SPY)

The S&P 500 is up more than 8% year-to-date, leading many to believe the market’s recent performance is disconnected from the economy at large. As investors look forward, they see a “great rotation” from bonds to stocks lifting the general market, not out of appreciation for equities, but from a fear that fixed-income performance will only leave investors behind.

There are substitutes to the broad market, though. One hot ETF gives investors all the exposure to stocks they might need, with less volatility and market-beating returns.

8 Sector ETFs for 2013

A dividend ETF for all

The SPDR S&P Dividend (ETF) (NYSEARCA:SDY) has logged market-beating performance, while providing investors with a less volatile portfolio. In a low rate environment like this one, the fund’s impressive 3% dividend yield gives the fund a natural buoy when stocks take a dip, and more upside when equities outperform.

Don’t worry, the 86 companies making up the fund have been discovered for their consistent profits, earnings quality, and dividend payments. The fund is built around a popular Dividend Aristocrats index, and it trades at a relative premium to the broad market S&P 500 index. The Dividend ETF has a forward earnings multiple of 15.59 compared to 13.77 for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY) tracker.

However, the fund makes it up in consistency. Companies in the index are selected after years of consistent dividend growth and high annual yields. In the last five years, the SPDR Dividend ETF delivered enormous 47% total returns compared to the S&P 500 index. The fund trumps the index in yields, rewarding investors with 50% more dividends each year.

Positioning for a great rotation…or a dip

The great thing about the SPDR Dividend ETF is that it puts investors in line to be successful in any market.

Consider two likely outcomes of this year’s trading:

1. A great rotation happens, and bond investors swap fixed income investments for equity exposure. Their preference will likely be for high-yielding dividend stocks, such as those that make up the Dividend Acheivers index. Advisors are pointing to a risk-on attitude with those who previously enjoyed bond investments. Bond-like yields in the equities space are particularly alluring for those who want capital appreciation and consistent income.

2. Stocks sell off as the market corrects for spectacular recent performance. The Dividend Aristocrats, having a consistent dividend history and high yields to backstop a market drop, will be supported by their relative yields.

In any event, those who position themselves in top-quality dividend paying companies win out. Over time, more than half of the stock market’s return has come from dividends. History also shows that dividend-paying companies are less volatile, while a basket of high-quality firms tend to outperform the market. The Dividend Acheivers have even kept pace in recent stock market rallies – in fact, they’re beating the S&P 500 this year by nearly 3%…and it’s only March.

Whether you’re interested in front-running a great rotation, or making a long-term investment in a quality fund, the SPDR Dividend ETF is an attractive alternative to the broad market S&P 500 tracker.

The article Sensing a Market Top? Seek this Stock for Downside Protection originally appeared on Fool.com and is written by Jordan Wathen.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

Biotech Insider Alert - $6 Stock To Hit $40

$200 Million Dollar Healthcare Hedge Fund's #1 Best Idea Right Now

The best healthcare hedge fund out there right now is one of the largest shareholders in this biotech stock. The fund returned more than 20% in each of the last 2 years with a virtually fully hedged portfolio, and it's sending out a BUY signal on this biotech stock. Get your FREE REPORT today (retail value of $300)

This is a FREE report from Insider Monkey. Credit Card is NOT required.
Comments
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months. Our beta is only 1.2 (don't click this link if beating the market isn't important to you).

Lists

The Oldest Money Managers

The Greatest Directors in the World

Largest Animals in the World

World’s Most Expensive Desserts

Best Selling Comic Books of All Time

A-list Actors who Sabotaged Their Career

Rappers With a College Degree

The Best Jazz Albums of all Time

The Most Influential Jazz Musicians

The World’s Most Famous Photographers

The Best Oscar-Winning Songs

Most Influential Choreographers Ever

Most Expensive Department Stores in the World

The Most Expensive Stolen Paintings in the World

The World’s Most Expensive Teas

Top Oscar Record Holders

The Most Expensive Flowers in the World

Countries With a Booming Film Industry

Most Expensive Cupcakes in the World

Uncommon European Escapes

The Most Stolen Artists in History

Best Travel Destinations in Australia

World’s Most Expensive Musical Instruments

World’s Most Famous Animals

Most Expensive Cakes in the World

Most Expensive Kosher Champagne in the World

Most Expensive Kosher Wine in the World

The Most Surprisingly Dark Fairy Tales

Most Popular Travel Destinations in Asia

The 10 Most Expensive Dresses Ever Worn to the Oscars

World’s Most Visited Art Museums

Best Countries for Photographers to Work in

Best Paid Jobs in the Film Industry

The Most Renowned Recovered Paintings Ever

Child Stars That Turned out Just Fine

Books That Were Banned in the Past Century

World’s Richest Dancers

Best Remedies against Bad Breath

Foods That Improve Your Skin Texture

Best-Selling Children’s Books of all Time

Foods That Boost Your Libido

Best-Selling Books of all Time

The Most Expensive Academy Awards Jewelry in History

Most Expensive Japanese Restaurant In New York City

The Best B-Boy Movies

Most Awesome Hip Hop Documentaries

Foods That Stain Your Teeth

Richest Doctors in the World

The Best Movie Sountracks Ever

The Highest Grossing Musicals on Broadway

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 129% in 2.5 years!! Wondering How?

Download a complete edition of our newsletter for free!