Demand for dividend ETFs has climbed throughout 2022 as advisors and investors have looked to alternative forms of income in the face of high inflation and aggressive actions by the Federal Reserve. Among the ETFs to pull in new money was the ALPS Sector Dividend DOGS (SDOG). The $1.3 billion ETF benefitted from just over $100 million of new money this year, but those investors need to be aware that the index behind SDOG was just rebalanced and reconstituted last Friday, December 16.
SDOG holds the five highest dividend-yielding stocks in 10 sectors from within the S&P 500 Index, equally weights them, and is reminiscent of the Dogs of the Dow approach, which surmises that blue-chip, dividend-paying companies that fall out of favor in one year will bounce back in the subsequent year. Indeed, SDOG was down 0.5% year-to-date through December 14, beating the SPDR S&P 500 ETF (SPY) by a whopping 1,500 basis points.
Heading into 2023, SDOG looks different than it did throughout 2022. Indeed, 16 of the 50 stocks were just replaced by higher yielding and potentially more undervalued peers within the sector. The 12-month yield for SDOG was 3.8% as of the end of November, more than double that of the S&P 500 Index, and the addition of many high-yielding stocks should keep the income stream relatively strong. Indeed, according to VettaFi, which runs the index behind SDOG, as of mid-December the yield would increase by approximately 40 basis points post rebalance.
Let’s look at some of the new and old positions. Within healthcare, Medtronic, Organon, and Viatris took the place of Amgen, Bristol-Myers, and Cardinal Health and joined returning positions AbbVie and Gilead Sciences. Both Organon and Viatris recently had a 4%-plus dividend yield.
Within energy, Devon Energy and Phillips 66 assumed the spots previously held by Exxon Mobil and Valero Energy due to the 3.7% and 3.5% yields they respectively provide. The new energy constituents joined Kinder Morgan, Oneok, and the Williams Companies within SDOG’s energy sector.
The information technology sector was another one in which SDOG had multiple replacements. Corning and HP Inc. were added while Cisco Systems and Hewlett Packard were sold off. The three other tech sector positions for SDOG consist of IBM, Intel, and Seagate Technology.
While many high dividend-yielding U.S. equity ETFs tend to overweight certain sectors, like energy and healthcare, and are underweighted to information technology, SDOG is unique with its equally weighted sector and stock representation.
Other high dividend-yielding stocks to remain inside SDOG include Altria Group, AT&T, Newell Brands, Verizon Communications, and VF Corp.
Advisors need to periodically review what is inside alternatively weighted index-based equity ETFs to ensure they remain comfortable with the exposure and that the fund is not drifting from the mandate they expected. A rebalance toward the higher yielding stocks within a sector should and does result in some portfolio turnover. However, due to tax efficiency benefits of the ETF structure, the changes made to the index are not expected to result in a capital gains impact for loyal shareholders.
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