The Federal Reserve is likely to raise interest rates in March, the first of what could be four rate hikes (maybe more) this year, but bond yields remain low.
That’s prompting some market participants to ditch bond funds and flock to dividend products, including exchange traded funds. That trend could have benefits for the ALPS Sector Dividend Dogs ETF (SDOG).
“U.S. investors are snapping up funds that invest in dividend-paying stocks as they search for stable income from alternatives to bond markets, which are being roiled by the prospect of rate rises. According to Refinitiv Lipper, investors bought $6.9 billion in U.S. dividend funds in January, the highest net purchases since October 2006,” reports Patturaja Murugaboopathy for Reuters.
Conversely, fixed income funds suffered through $20 billion in outflows in the first month of 2022. Year-to-date, investors allocated nearly $14 million in fresh capital to SDOG, a sign that market participants find the 3.18% dividend yield offered by the ALPS ETF alluring in today’s low-yield climate. SDOG is rewarding that faith, as the fund is higher year-to-date while the S&P 500 is saddled with a loss of 5%.
“There has been elevated volatility in global equity markets this year on concerns over higher yields and inflation levels, which tend to squeeze corporate profit margins,” according to Reuters. “Dividend funds are seen as safe and offering some stability in that scenario, as they hold well-established companies that have better pricing power and a track record of providing stable income.”
In addition to being an alternative to bonds against the backdrop of rising interest rates, SDOG has inflation-fighting potential by way of a more than combined 21% weight to the energy and consumer staples sectors — a significant overweight to those groups relative to the S&P 500.
Another point in favor of SDOG is top-line growth for some of its marquee sector exposures, which could translate to earnings growth. That could provide dividend support and, perhaps, payout growth.
“Sectors such as energy and banks, which have high dividend yields, are expected to enjoy revenue growth this year, benefiting from higher interest rates and inflation levels,” notes Reuters.
Energy and bank equities combine for over 20% of SDOG’s portfolio.
Other high-dividend ETFs include the SPDR S&P Dividend ETF (SDY), the iShares Select Dividend ETF (NYSEArca: DVY), and the iShares Core High Dividend ETF (HDV).
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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.
