The ALPS Sector Dividend Dogs ETF (SDOG) returned nearly 17% through the first seven months of 2021 – an admirable performance to be sure, but that’s not the really eye-catching number associated with this exchange traded fund.

Due to rock-bottom Treasury yields, the number that stands out with SDOG may just be its 3.21% dividend yield.

“The dividend yield on the S&P 500 has fallen to 1.3% — its lowest level since the tail end of the dot-com bubble two decades ago,” reports Daren Fonda for Barron’s.

Proving that methodology matters when it comes to dividend ETFs, SDOG tops pure-beta broad market funds on the basis of yield because the fund selects the five highest-yielding stocks in 10 of the 11 GICS sectors, excluding real estate.

While yield weighting isn’t the perfect structure for dividend funds, SDOG mitigates some of the risks associated with this strategy by taking holdings- and sector-level precautions. For example, the fund caps sector allocations at 10% and component weights at 2% upon rebalancing.

SDOG 1 Year Performance

Equally weighting holdings in a high dividend fund is potentially beneficial to investors because some companies with big payouts may be burdened by those obligations. The SDOG methodology minimizes investors’ exposure to those firms.

Fortunately, the S&P 500’s payout ratio is just over 37%, implying many SDOG components are strained by dividends. Moreover, as Jim Paulsen, chief investment strategist at the Leuthold Group, tells Barron’s, the yield on the S&P 500 relative to the payout ratio is even lower than 1.3%.

“However, if the payout ratio today was the same as it was in August 2000, the dividend yield today would be 1.05% versus 1.055% in Aug. 2000. Essentially, if the payout ratio today was the same as it was then, the dividend yield would be just as low as at the dot-com top,” he said.

That further highlights the allure of SDOG’s 3.21% yield, particularly when it appears as though many of the fund’s holdings can afford current payouts and perhaps even grow dividends going forward.

With the yield on the S&P 500 barely noticeable and SDOG’s ability to mute some typical high dividend risks, the fund is an idea to consider, particularly if cyclical value names come back into style later this year.

Other high dividend ETFs include the SPDR S&P Dividend ETF (SDY), iShares Select Dividend ETF (NYSEArca: DVY), and 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.