Rumor has it the worst is over in terms of this year’s bad dividend news and that could support a late 2020 rally by 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 imperiled value ideas.
Following a spate of dividend cuts and suspensions by S&P 500 member firms in the first half of 2020, some investors soured on high dividend strategies, but the outlook improving, SDOG could be back in the spotlight in a positive way.
“What’s more, some of the companies that are reinstating quarterly payouts are doing so at reduced levels,” reports Lawrence Strauss for Barron’s. “Nevertheless, the reinstatements potentially signal that the pressure on payouts earlier in the pandemic is easing in certain sectors.”
SDOG for Value and More
Another positive is that SDOG isn’t a dedicated value fund – it has low volatility, quality, and size leanings – meaning that its potential upside isn’t entirely levered to value bouncing back.
“Still, there are other signs that dividend health is improving besides the recent reinstatements. In August, for example, 13 companies in the S&P 500 index declared dividend increases against two that announced cuts, according to S&P Dow Jones Indices,” reports Barron’s.
A point in SDOG’s favor is that many high dividend firms are in mature industries, such as consumer staples and utilities. That maturity better positions these firms to at least maintain payouts in rough environments. Plus, companies from those sectors prioritize payouts and usually have the cash to support dividend growth.
“Common wisdom has been that high-dividend-paying companies tend to be focused in more mature industries,” according to BlackRock. “Companies within sectors such as Consumer Staples and Utilities for example, can afford to pay more of their earnings out in the form of dividends; they are generally more established, have high barriers to entry, and are less focused on reinvesting for rapid growth.”
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.