The utilities sector accounts for just 3.11% of the S&P 500, but with the sector looking sturdy and still offering above-average income, adding more exposure to the sector is advisable for some investors. The ALPS Sector Dividend Dogs ETF (SDOG) is an option to consider on that front.
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.
“Utilities are best known for producing reliable dividends for income-hungry investors in the best and worst of times,” reports Carleton English for Barron’s. “That assumption has been upended by the coronavirus, as investors worry about reduced electricity use by businesses and missed payments by unemployed workers. As a result, they’ve instead flocked to technology, consumer staples, and other sectors that make stay-at-home life more bearable.”
SDOG Methodology
SDOG equally weights 10 of the 11 S&P 500 sectors with real estate excluded. As such, its 9.98% utilities weight is more than triple that of the S&P 500. That could be a positive trait at a time when utilities stock appear poised for near-term upside.
“Although utilities have fallen out of favor, with the stocks down 3.3% since the end of May, conditions are still favorable for the group. Interest rates are low, adding to the appeal of their dividends, while the stocks appear to be oversold, based on technical levels,” according to Barron’s.
The defensive and yield-generating utilities play is garnering greater attention as a growing number of people are looking to global central banks, including the Fed, to lose monetary policies and execute accommodative measures to obviate a potential economic downturn in response to the coronavirus outbreak.
Utilities are typically more stable stocks since the demand for their services, notably electricity and gas, is steady from both consumers and businesses. Moreover, in a lower-for-longer yield environment, utilities come with more attractive above-average dividends. SDOG’s components from the 10 S&P 500 sectors are the five highest-yielding members of those groups.
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.
