A Cyclical Play with Value Pay: The ALPS SDOG ETF | ETF Trends

Dividend equities are forecast to be back in style next year, and that could provide tailwinds for high payout exchange traded funds, such as the ALPS Sector Dividend Dogs ETF (SDOG).

SDOG tries to reflect the performance of the S-Network Sector Dividend Dogs Index, which applies the “Dogs of the Dow Theory” on a sector-by-sector basis using the S&P 500 with a focus on high dividend exposure. SDOG’s equal-weight methodology is important because it reduces sector-level risk and dependence of some groups that are considered to be imperiled value ideas.

Dividends are in demand as fixed-income investors face a lower-for-longer interest rate environment. Federal Reserve is expected to maintain its near-zero interest rate policy to help push inflation up, bolster the economy, and lower the unemployment rate. The Fed has already stated it was willing to let inflation run higher to offset years inflation fell below its 2% target.

“Payouts are already starting to pick up. After a year where dividend cuts and suspensions were common in corporate America, there were 29 dividend increases and one initiation in November, compared with one cut and no suspensions, according to Howard Silverblatt, senior index analyst at S&P Dow Jones Indices,” reports Jesse Pound for CNBC.

High Dividend Strategies in 2021

With its equal-weight sector methodology, SDOG tilts toward value and cyclical stocks, two concepts that have been soaring since early November.

SDOG YTD Performance

Adding to the allure of high dividend strategies is that many companies are growing more confident in their ability to service and grow dividends heading into 2021, meaning even some high-yield stocks could be back in style after a rough patch in the first half of 2020.

Companies are growing more confident in growing dividends again, even as another surge in Covid-19 cases threatens earnings. According to FactSet estimates, S&P 500 per-share earnings are expected to bounce 22% in 2021—to above 2019 levels.

As a result, companies are feeling better about returning more of their capital to shareholders. S&P 500 dividends are expected to grow 3% in 2021 from 2020, according to FactSet. The payout ratio—the percent of earnings companies use to pay dividends — is expected to fall to about 35% from 42%, but the pure growth in dividend dollars still provides an attractive yield opportunity at current prices.

“Silverblatt said in a note to clients that the amount paid out in dividends next year could surpass 2019, before companies were even thinking about the pandemic,” according to CNBC.

Other high dividend ETFs include the SPDR S&P Dividend ETF (SDY), iShares Select Dividend ETF (NYSEArca: DVY), and the iShares Core High Dividend ETF (HDV).

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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.