Cyclical stocks are showing signs of life and investors looking to play that theme with an income an advantage can consider the ALPS Sector Dividend Dogs ETF (SDOG).
SDOG isn’t a cap-weighted fund. Rather, it’s holdings are equally weighted, giving it different sector allocations than the S&P 500. A result of that methodology is that SDOG is overweight some cyclical groups, such as materials and energy, relative to the benchmark domestic equity gauge. That could be advantageous over the near-term.
“U.S. economic data released in August generally exceeded consensus forecasts in the realms of both manufacturing and services, with surprising strength in job gains,” said BlackRock in a recent note. “Housing data was also strong last month, with both new and existing home sales coming in above consensus expectations.”
Cyclicals and Dividends
SDOG does an admirable job of mixing cyclical and defensive exposure, potentially mitigating some of the bumpiness that comes along with investing in economically sensitive stocks.
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.
SDOG is all the more relevant today because it’s not a broadly cyclical fund. In fact, it leaves real estate, which is one of the cyclical sectors and it’s not dramatically overweight financial services stocks.
“While the current economic recovery supports cyclicals, this is not the time to take broad strokes across all cyclical sectors,” according to BlackRock. “Investors seeking to capture these opportunities must be highly discerning and avoid low quality and secularly impaired value stocks. We favor segments that provide niche services with long-term pricing power as well as companies that exhibit earnings consistency and stable profitability. Another tactic is to look for opportunities at the intersection of cyclical and secular growth, such as semiconductor companies.”
SDOG yields 4.73%, or nearly 300 basis points more than the dividend yield on the S&P 500.
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).
For more on cornerstone strategies, visit our ETF Building Blocks Channel.
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.
