Advisors can capture yield in client portfolios by layering the ALPS Sector Dividend Dogs ETF (SDOG), a deep value strategy, and the ALPS O’Shares U.S. Quality Dividend ETF (OUSA), a quality strategy.
A blended portfolio of SDOG and OUSA has the potential to provide an optimal large-cap mix of high-yield, deep-value stocks with high-quality, dividend-growing stocks that can reduce the portfolio volatility that tends to accompany high-dividend strategies, according to SS&C ALPS Advisors.
Advisors looking to capture yield for clients to offset the lost purchasing power from elevated inflation can sometimes find themselves in a classic value trap, or with companies that are financing dividends through rolling debt, more common among dividend growth strategies, according to SS&C ALPS Advisors.
Investing in the blended portfolio can enhance relative returns in the value sleeve with an elevated yield of 2.89%, a more attractive relative valuation than the Russell 1000 Value Index, and lower historical portfolio volatility as of December 31. The blended portfolio has also exhibited superior risk and return statistics over the past five years, according to ALSP.
SDOG’s yield-driven methodology equally weights the top five highest dividend-payers in each sector (excluding real estate). The fund overweights pro-cyclical sectors including energy, materials, and industrials, providing a tailwind during inflationary periods.
OUSA offers exposure to quality U.S. equities by selecting companies that have sustainable dividends, a high return on assets, and low levels of debt.
SDOG’s five-year average annual dividend growth is 6.05% vs. the S&P 500 (tracked by the SPDR S&P 500 ETF [SPY]) at 5.73%, while OUSA’s five-year average ROA is 11.66% vs. the S&P 500 at 9.84% as of December 31, according to Bloomberg data.
According to Bloomberg, companies with higher five-year average annual dividend growth in the S&P 500 Index (SPX) have typically outperformed over five years, as have companies with a higher five-year average ROA.
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