XLV's Cap-Weighted Structure Dilutes Dividend Income

The Health Care Select Sector SPDR Fund (XLV) is a popular choice for investors seeking one-ticker exposure to the healthcare sector, but it may not be delivering on its promise of income. The fund's cap-weighted structure prioritizes market capitalization over yield, leading to a diluted dividend income for investors.

Three top holdings in XLV - Eli Lilly, AbbVie, and Johnson & Johnson - pay substantially lower yields than their individual components would suggest. In fact, the blended distribution of XLV's top holdings lands near 1.5%, which may not be enough for retirees or income-focused investors.

A closer look at these three stocks reveals that owning them directly can capture a significantly higher yield. AbbVie pays a quarterly dividend of $1.73, an annualized $6.92, for a yield of roughly 2.65%. Johnson & Johnson yields near 2%, with a history of quarterly increases from $0.90 in 2018 to $1.34 in 2026. Bristol Myers Squibb delivers the biggest income lift, with a yield of 3.75%.

While trading individual stocks introduces single-stock risk and lacks the automatic rebalancing provided by an index fund, the potential benefits may outweigh these tradeoffs for income-focused investors. By layering in AbbVie, Johnson & Johnson, and Bristol Myers Squibb alongside XLV, investors can lift their healthcare-sleeve yield from roughly 1.5% into the 2.5% to 3.5% zone.