ETF Trends CEO Tom Lydon discussed the ALPS Sector Dividend Dogs ETF (SDOG) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
This ETF offers exposure to a strategy that is largely similar to the popular “Dogs of the Dow” approach that involves a portfolio consisting of the ten components of the Dow Jones Industrial Average with the highest dividend yields. SDOG, however, casts a much wider net by drawing from the S&P 500 as its universe of potential stocks. The fund is also unique in that it maintains equal allocations to each of ten sectors; that makes it very different from many dividend-focused products, which tend to have biases towards utilities and financials. The portfolio also consists of equal weighting to each individual component stocks, which might be appealing to those who favor equal weight strategies.
SDOG will help investors capitalize on the “Dogs of the Dow Theory” with its dividend ETF strategy. To clarify, in the 1990s, a reversion-to-the-mean investment strategy gained traction that focused solely on the highest-dividend yielding stocks in the Dow Jones Industrials Average (DJIA). Investing annually in just the DJIA stocks with the highest yields was based on a belief that those stocks that underperformed in one year but were supported by an attractive dividend yield would recover and outperform the next.
This fund puts this Dogs of the Dow Theory to practice. There’s a high conviction tilt towards income. Screening is isolated at the sector level, providing high dividend exposure by selecting the five highest-yielding securities in ten of the eleven GICS sectors (excluding the Real Estate sector).
Exposure to the value factor could be in play following rotation away from high growth that has outperformed this year to cheaper cyclical sectors. Value stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales).
While they generally have solid fundamentals, value stocks may have lost popularity in the market and are considered bargain-priced compared with their competitors. Value fans believe this time may be different for value stocks, pointing to improving investment sentiment measures, abating fears of a recession, rebounding corporate profits, and lessening trade tensions between the U.S. and China. Furthermore, value stocks are now trading at some of their most attractive prices in years as the growth/value gap is as wide as it’s been in decades.
Capitalize On The Dogs
Cyclical sectors stand to rebound with three potential viable coronavirus vaccines to help the economy return to normal.
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, so lower-for-longer rates.
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.
Investors should consider quality dividend growth stocks that typically exhibit stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders, and management team conviction in their businesses.
Listen to the full podcast episode on the SDOG ETF:
For more podcast episodes featuring Tom Lydon, visit our podcasts category.