Conventional dividend wisdom holds that some companies with high yields are financially burdened by their payout obligations and eventually lead investors to dividend disappointment in the form of cuts or suspensions.
However, high dividend exchange traded funds are popular with investors, and that’s particularly true today owing to low interest rates. The ALPS Sector Dividend Dogs ETF (SDOG) is an example of a fund in this category as highlighted by a dividend yield of 3.18%.
More importantly, SDOG is an example of a high dividend ETF where investors don’t have to take on significant risk to enjoy the benefits of above-average payouts. In fact, a massive percentage of SDOG components sport investment-grade credit ratings, a trait that’s not always easy to come by in the high dividend universe. That’s important because strong credit can be a sign of a viable dividend. Conversely, credit downgrades can arrive because ratings agencies view a company as spending too much on dividends. That can lead to cuts because companies need to appease bondholders.
“Shifting to a broad equity income index, the S-Network Sector Dividend Dogs Index (SDOGX) offers attractive income from quality companies, with investment-grade companies representing over 86% of the index by weighting,” says Alerian analyst Stacey Morris.
SDOG equally weights its sector exposures and includes real estate stocks so its sector weights range from 9.21% to 11.09%. That also means that the ETF is significantly overweighted to the energy and materials sectors — two groups with plenty of junk-rated companies — relative to the S&P 500. However, as noted above, SDOG is home to a slew of investment-grade companies.
Add to that, the yield on the S-Network Sector Dividend Dogs Index is currently well below the five-year average of 4.44%, indicating that SDOG components are rallying in price and not strained by dividend commitments.
Obviously, dividend investing is a long-term strategy, meaning that payout sustainability is of the utmost importance to smart income investors. Fortunately, SDOG has positive traits on the sustainability front.
“Multiple screens for dividend durability, including evaluating cash flows, EBITDA, and debt-to-equity ratios, help ensure reliable income from the durable dividend indexes. While current yields are below the 5-year average, they are well above the S&P 500’s current 1.41% yield,” adds Alerian’s Morris.
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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.