Dividends have been a hugely popular option over the last several months, with advisors and investors using current income to buoy their portfolios. But dividends aren’t the only investing factor to have had a solid few months. Value has also reemerged as a big dog among investment styles. The so-called “value trap” may sour some advisors on a value outlook, but by adding current income in a value dividend ETF like the ALPS Sector Dividend Dogs ETF (SDOG) investors can get the benefits of value with less trap risk.
Value has been a potent source of return of late for ETF investors. The SPDR Portfolio S&P 500 Value ETF (SPYV), for example, has returned 9.2%.
What is the value trap? It’s inherent to value investing. What happens if managers miss when trying to identify undervalued companies and end up investing in firms that merit their downgraded status, including companies financially unstable or under pressure? Managers may try to avoid the value trap by using fundamentals, bottom-up analysis, or any other value investing approach. Still the trap persists in some cases.
See more: “ALPS Cuts Fees on Dividend Value ETF ‘SDOG’”
SDOG Focuses on Dividends, Value
So how should investors look to get access to the advantages of value that have shown so brightly this year while mitigating the impact of the value trap? The value dividend ETF SDOG offers two different answers, starting with its dividend focus.
Dividends aren’t just a helpful source of current income. They’re not offered by every single firm, either: firms have to be financially stable to offer out dividends. In fact, dividends often prove to be a more reliable measure of equities than measures like price-to-earnings, for example. That’s not to say that it’s a perfect indicator, but dividends do provide year-long measures of a company’s ups and downs.
Consistent dividend increases in a value target company may help identify those firms that would avoid the value trap. SDOG brings the “Dogs of the DOW” approach but adds a secondary benefit in an equal weight approach. The fund applies an equal weight to ten different sectors in making its allocations towards large caps.
SDOG has recently sent up a key buying signal, and as a source of alternative income, may be worth a look. Charging 36 basis points, SDOG currently holds $1.3 billion in AUM and offers an annual dividend yield of 3.9%, and may be worth watching to get the benefits of value without the same degree of risk.
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