S&P 500 dividend growth is slowing, but that does not mean stocks with consistently rising payouts and the exchange traded funds that focus on those names should be eschewed by income investors in 2017. Quite the contrary as the current market environment, including rising interest rates, could be suitable to quality dividend growers.
The ALPS Sector Dividend Dogs ETF (NYSEArca: SDOG) is one dividend worth considering. SDOG tries to reflect the performance of the S-Network Sector Dividend Dogs Index, which applies the “Dogs of the Dow Theory” on a sector-by-sector basis using the S&P 500 with a focus on high dividend exposure.
SDOG’s underlying has a dividend yield of nearly 4% and a low beta, indicating the combined 30.5% to three defensive sectors – telecom, staples and utilities – helps reduce the fund’s volatility. SDOG charges 0.4% per year and can be traded commission-free on the Schwab ETF OneSource platform
“The $2 billion fund, last reconstituted in mid-December, aims to have each of its 50 holdings account for 2% of its assets, and each sector, 10% of the portfolio. However, because there are only four dividend-paying stocks in the S&P’s telecom sector, those weightings are slightly altered, with each of the 49 holdings making up just over 2% of the fund,” reports Lawrence Strauss for Barron’s.
Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return.
Over the past 40 years, companies that boost payouts have proven to be less volatile than their counterparts that cut, suspended or did not initiate or raise dividends.
Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks, such as SDOG. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.
SDOG “has a three-year annual return of 12.91%, better than 98% of its peers in Morningstar’s large-cap value category. It also did very well in 2013, 2014, and 2016, finishing in the top quarter of its category in each of those years. Its only off year was 2015, when it lost 3.18%,” according to Barron’s.
For more information on dividend stocks, visit our dividend ETFs category.
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.