With three-year Treasury yields hovering around 3.9% as of Aug. 9, it may not be surprising that, by some estimates, there’s $6.5 trillion sitting in money market accounts. Due to high interest rates, cash instruments are more appealing than they’ve been in years.
However, that scenario won’t be permanent. When the Federal Reserve finally lowers interest rates, cash and some short-term bonds could lose appeal. Conversely, low rates could prompt investors to revisit dividend stocks and related ETFs. Those including those of the high-payout variety. Enter the ALPS Sector Dividend Dogs ETF (SDOG).
SDOG sports a trailing 12-month distribution yield of 3.99%, slightly higher than the aforementioned yield on three-year Treasurys. Additionally, with an equal-weight sector methodology, SDOG is more defensive than many basic broad market funds. That could be appealing to investors looking to minimize risk as Election Day nears.
If Rates Fall, SDOG Could Be Place to Be
SDOG is home to about 50 stocks. Plenty of them reside on a list of 74 names that beat yields on cash instruments published last week by Bank of America. The bank believes that when the Fed starts paring borrowing costs in September, the easing campaign will last through 2026, with the Fed funds rate ultimately ending up at 3.25% or 3.50%.
“A drop in money market yields could drive a shift in retiree assets into higher dividend-yielding stocks,” observed Bank of America strategist Savita Subramanian.
The bank’s list of 74 stocks that could continue sporting yields in excess of cash when interest rates decline is heavy on consumer staples, energy, and financial services stocks. Those sectors combine for approximately 30% of the SDOG roster.
SDOG member firms appearing on the Bank of America list include AT&T (T), Bristol-Myers Squibb Co. (BMY), Citizens Financial Group Inc. (CFG), Exxon Mobil (XOM), and Chevron (CVX), among others. SDOG holding Altria Group (MO), one of the largest tobacco companies, also made Bank of America’s list of companies that return more capital than the cost of capital incurred. That’s a positive signal, to be sure. Gilead Sciences (GILD), another SDOG holding, also appears on both lists.
Many SDOG components also fit the bill as quality companies. And that could be an alluring trait if the economy contracts or equity market volatility increases.
“Given ongoing economic uncertainty and stock market volatility, investors looking for the best dividend stocks might consider adding undervalued, quality dividend stocks to their portfolios,” according to Morningstar. “After all, quality companies have the financial stability to maintain their dividends during questionable economic periods, and price risk is reduced when investors can buy the stocks of these companies on the cheap.”
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VettaFi LLC (“VettaFi”) is the index provider for SDOG, for which it receives an index licensing fee. However, SDOG is/are not issued, sponsored, endorsed, or sold by VettaFi, and VettaFi has no obligation or liability in connection with the issuance, administration, marketing, or trading of SDOG.
