The Federal Reserve Chair Jerome Powell’s gloomy speech last week in Jackson Hole, Wyoming, warned investors of the Central Bank’s utmost commitment to bring down inflation. Even after a total of 2.25 percentage points of rate hikes, Powell confirmed that this is “no place to stop or pause.” He admitted that the policies would bring “some pain.”
Economist Stephen Roach believes that a deeper downturn might be on the horizon after the first half’s negative economic growth. “We’re going to have a cumulative drop in the economy [GDP] somewhere of around 1.5% to 2%. And, the unemployment rate is going to have to go up by 1 to 2 percentage points in a minimum,” said Roach.
Experts have warned that there might be a long way to go before the tight monetary policy is reversed, which might induce greater market volatility.
Given this backdrop, we think the dividend-paying ETFs Energy Select Sector SPDR Fund (XLE), SPDR S&P Dividend ETF (SDY), and Vanguard Utilities Index Fund (VPU) might be ideal investments to build one’s retirement account around.
Energy Select Sector SPDR Fund (XLE)
XLE seeks to provide before-expenses investment results that correspond with the price and yield performance of the Energy Select Sector Index companies. The fund offers exposure to the United States energy sector and can be used as a tactical overlay for investors looking for exposure.
As of August 29, the fund’s top holdings include Exxon Mobil Corporation (XOM) with a 22.83% weight, Chevron Corporation (CVX) with a 20.78% weight, ConocoPhillips (COP) with a 4.87% weight, Occidental Petroleum Corporation (OXY) with a 4.77% weight. It has a beta of 1.58. XLE has $39.06 billion in assets under management. Its expense ratio of 0.10% is significantly lower than the category average of 0.46%
Its NAV stands at $84.10 as of August 29. Its annual dividend rate of $2.16 yields 3.75% on current prices. Its dividend payouts have increased at a 9.5% CAGR over the past three years and a 10.8% CAGR over the past five years. The fund has a four-year average yield of 5.49%.
The ETF has increased 70.5% over the past year and 51.5% year-to-date to close its last trading session at $84.09. Its fund flows came in at $50.18 million over the past year and $350.98 million over the past month.
XLE’s strong fundamentals are reflected in its POWR Ratings. The ETF has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
SPDR S&P Dividend ETF (SDY)
SDY is linked to the S&P High Yield Dividend Aristocrats Index, which offers exposure to dividend-paying large-cap companies that exhibit value characteristics in the U.S. equity market. SDY invests in companies that are likely to continue paying dividends.
As of August 29, the fund has a NAV of $125.94. Its total expense ratio of 0.35% is substantially lower than the category average of 0.50%. It has $22.25 billion in assets under management. The fund’s annual dividend of $3.41 yields 2.70% on current prices. Its dividend payouts have increased at an 11.5% CAGR over the past three years and an 8.6% CAGR over the past five years. The fund has a four-year average yield of 2.85%.
As of August 29, SDY’s top holdings include Franklin Resources, Inc. (BEN) and Leggett & Platt, Incorporated (LEG), both with 1.76% weight of the fund, National Retail Properties, Inc. (NNN) with 1.69% of the fund, and International Business Machines Corporation (IBM) with 1.63% of the fund.
SDY’s fund flows came in at $2.14 billion over the past year and $1.72 billion over the past six months. The ETF has gained 2.4% over the past six months to close its last trading session at $125.97. It has a beta of 0.85.
This promising prospect is reflected in SDY’s POWR Ratings. The ETF has an overall A rating, equating to a Strong Buy on our proprietary rating system.
Vanguard Utilities Index Fund (VPU)
VPU gives exposure to the domestic utilities sector, a market corner that conventionally exhibits low volatility and features a distribution yield. The fund utilizes an indexing investment approach, tracking the performance of the MSCI US Investable Market Index (IMI)/Utilities 25/50 index.
As of August 29, VPU’s top holdings include NextEra Energy Inc. (NEE), with 13.79% of the fund, Duke Energy Corp. (DUK), with 7.03% of the fund, and Southern Co. (SO), with 6.78% of the fund. The fund’s total net assets stood at $7.78 billion. It has a NAV of $164.93 as of August 29.
Its annual dividend rate of $4.49 yields 3.07% at current prices. Its dividend payouts have increased at a 3.9% CAGR over the past three years and a 3.5% CAGR over the past five years. It has a four-year average yield of 2.99%.
VPU’s fund flows came in at $467.70 million over the past year and $72.48 million over the past six months. The fund has gained 10.5% over the past year and 12.4% over the past six months to close yesterday’s trading session at $164.99. Moreover, its expense ratio of 0.10% is considerably lower than the category average of 0.43%. It has a beta of 0.55.
It’s no surprise that VPU has an overall A rating, which translates to a Strong Buy in our POWR Ratings system.
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XLE shares were trading at $81.06 per share on Tuesday afternoon, down $3.03 (-3.60%). Year-to-date, XLE has gained 49.10%, versus a -15.71% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities. More...
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