One of the end-of-year traditions some equity income investors love is evaluating the new “dogs of the Dow” — the 10 members of the Dow Jones Industrial Average with the highest dividend yields at the end of the year.
The strategy, which has been around for over three decades, is simple. Based on the premise that, more often than not, a stock gets a high dividend yield because its price declined, some investors bet that the dogs of the Dow will outperform in the coming year.
The ALPS Sector Dividend Dogs ETF (SDOG) is an example of an exchange traded fund that puts this theory into practice. SDOG doesn’t follow the Dow Jones Industrial Average — its underlying index is the S-Network Sector Dividend Dogs Index. Likewise, not all of SDOG’s components are dogs of the Dow, and that can be a good thing.
“They’re dogs for a reason, but when you have these great companies with incredibly long and stellar track records, they have bumps along the way but can respond,” said Kevin Simpson, founder and chief investment officer of Capital Wealth Planning, in an interview with CNBC.
Ranked by highest to lowest dividend yield, these are the dogs of the Dow for 2022: Dow, Inc. (NYSE:DOW), International Business Machines (NYSE:IBM), Verizon (NYSE:VZ), Chevron (NYSE:CVX), Walgreens (NASDAQ:WBA), Merck (NYSE:MRK), Amgen (NASDAQ:AMGN), 3M (NYSE:MMM), Coca-Cola (NYSE:KO), and Intel (NASDAQ:INTC).
Of that group, seven are members of the SDOG lineup. Those seven are, in order of weight in the ETF, Amgen, IBM, Verizon, Walgreens, Intel, Dow, and 3M. Investors should note that SDOG is a potentially useful way of accessing the dogs of the Dow for multiple reasons.
First, as noted above, SDOG holds other stocks. Second, the fund equally weights its components, so even if a few of the dogs of the Dow remain dogs in 2022, the SDOG won’t be highly vulnerable because none of its holdings exceed weights of 2.17%, and the biggest dog by weight for 2022 in the ETF is Amgen, at an allocation of just 2.1%. The Federal Reserve could also affect SDOG in the new year.
“In 2022, expected interest rate hikes from the Federal Reserve could be good news for dividend payers. Stocks with solid dividend yields could perform better when interest rates are rising, thus driving down the value of bonds, Simpson said,” according to CNBC.
Other high-dividend ETFs include the SPDR S&P Dividend ETF (SDY), the iShares Select Dividend ETF (NYSEArca: DVY), and the iShares Core High Dividend ETF (HDV).
For more news, information, and strategy, visit the 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.
