On a standalone basis, the value factor is struggling again this year. So are high dividend strategies. Those factors meet in the ALPS Sector Dividend Dogs ETF (SDOG) and while the aforementioned struggles would appear to be an indictment of the ETF, the opposite could prove to be true.
There’s twofold reasoning for considering SDOG over the near-term. First, in terms of negative dividend action by high-yield companies, market observers believe the worst is over. Second, the growth/value gap is exceptionally wide by historical standards, meaning the value is exceptionally cheap.
“However, growth stocks recently traded at twice the valuation of value names,” reports Lawrence Strauss for Barron’s. “Before the recent spike, the gap between growth and value peaked in 2000 before narrowing when the tech-stock bubble burst. From 2000 through 2008, growth stocks traded at a discount to value, but since then, growth stocks have steadily powered higher.”
Seizing SDOG Opportunity
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 equal-weight methodology is important because it reduces sector-level risk and dependence of some groups that are considered to imperiled value ideas.
A point in SDOG’s favor is that many high dividend firms are in mature industries, such as consumer staples and utilities. That maturity better positions these firms to at least maintain payouts in rough environments. Plus, companies from those sectors prioritize payouts and usually have the cash to support dividend growth.
Companies that have consistently increased dividends tend to be high in quality and show a strong potential for growth. These dividend growers have been able to withstand periods of market duress, exhibiting smaller drawdowns as investors sold off riskier assets, while still delivering strong returns on the upside, to generate improved risk-adjusted returns over the long haul.
Moreover, a recovery in dividends could support a value rebound, which would give SDOG two upside catalysts for the price of one.
SDOG currently yields 4.83%, well above the yields on the S&P 500 and 10-year Treasuries.
Other high dividend ETFs include the SPDR S&P Dividend ETF (SDY), iShares Select Dividend ETF (NYSEArca: DVY), and the iShares Core High Dividend ETF (HDV).
For more on cornerstone strategies, visit our ETF Building Blocks Channel.
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.
