Breaking Down the ALPS SDOG ETF

The ALPS Sector Dividend Dogs ETF (SDOG) sports a dividend yield of 3.15% as of Aug. 12. While that’s more than double the comparable metric on the S&P 500 and certainly qualifies as “high-yield,” that yield is below SDOG’s historical norms.

That shouldn’t imply that SDOG’s isn’t offering enough income. SDOG, which tracks the S-Network Sector Dividend Dogs Index, equally weights 10 of the 11 GICS sectors, meaning it has above-market-weight allocations to the likes of consumer staples and utilities, which are known for above-average yields. Interestingly, SDOG achieves its robust yield status without any exposure to real estate, another high-yield sector.

Of course, it helps to put dividend yield into context, which is exactly what Alerian analyst Roxana Islam does in a recent note.

“Although dividend yield can provide a picture of the income potential of an investment, investors must consider more context before investing. Is the dividend yield high because the price of the investment fell? In this case, if the price normalizes back to median levels, the yield might be less than the investor desires. Or if the price stays low, the dividend might no longer be sustainable and could be cut. Also, does the investment have a history of paying sustainable/growing distributions?,” she writes.

For investors considering SDOG, the good news is that the fund’s yield isn’t high because of slack performance. As of Aug. 12, SDOG is up 19.40% year-to-date, or 35 basis points ahead of the S&P 500. That’s impressive under any circumstances and even more so when remembering SDOG has no real estate exposure, one of the best-performing sectors in the S&P 500 this year.

One way of looking at SDOG today is that while its dividend yield is well above those on broader benchmarks, the fund’s yield is healthy, which is everything when it comes sustainable payouts.

“In an environment where Treasury yields are falling and investors are searching for high yield investments, it is important to remember that the dividend yield tells only part of the story for a dividend-paying investment. Investors must also consider the health of the investment, price volatility, and past dividend history to evaluate the investment’s income potential,” adds Alerian’s Islam.

Further supporting the case for SDOG are expectations that dividend growth will hit a record in the current quarter. U.S. companies are also flush with cash, indicating they can maintain and grow payouts without having to incur debt.

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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.