A quirky dividend ETF based on a variation of the “Dogs of the Dow” investment approach is easily beating the S&P 500 this year while also paying an above-average yield.
ALPS Sector Dividend Dogs ETF (NYSEArca: SDOG) has delivered a total return of 16.9% year to date, versus an 11.7% gain for the S&P 500, according to Morningstar.
The ETF isolates the S&P 500 constituents with the highest dividend yield in their respective sectors “providing the potential for price appreciation as market forces bring their yield into line with the overall market,” according to ALPS, the fund manager. [Dow ‘Dividend Dogs’ ETF Launches]
SDOG was paying a 30-day SEC yield of 4% at the end of March. The fund charges an expense ratio of 0.40%.
The ETF recently broke through $200 million in assets. [ETFs for Yield: ‘Dividend Dogs’]
“This fund is less than one year old so getting to this level so soon should be commended,” said Chris Hempstead, director of ETF execution services at WallachBeth Capital LLC.
Next page: High dividends, value tilt
SDOG launched in June 2012. The ETF holds 50 companies and weights each stock equally.
“The fund’s index reconstitutes every year in a one-step screening process that identifies the five highest-yielding securities based on cash dividends paid in each of the S&P 500 Index’s 10 sectors as of the final trading day of November,” explains Morningstar analyst Robert Goldsborough in a report on SDOG. “The index also rebalances each quarter to give each sector a 10% weight and each security a 2% weight.”
The “Dogs of the Dow” approach was popularized by a book written by Michael B. O’Higgins published in 1991. The strategy is based around buying the 10 stocks in the Dow Jones Industrial Average with the highest dividend yields.
“The rationale behind the strategy is that given that most large companies seldom alter their dividends because of their market price, a company’s high dividend yield relative to its price signals that its business cycle may have bottomed out and that a stock-price rebound may be imminent,” Goldsborough notes.
“The strategy was discredited somewhat in the years following the publication of O’Higgins’ book, as it underperformed,” the analyst wrote in his SDOG profile. “Could the strategy’s historic success have been the result of data mining? Possibly, although it’s also noteworthy that the 1990s were not a particularly great decade for value investing, and this ‘dividend dogs’ strategy really is a value strategy.”
ALPS Sector Dividend Dogs ETF
