Late in 2020, enthusiasm for dividend and value stocks is being reborn, potentially setting the stage for an earnest rebound in 2021 by the ALPS Sector Dividend Dogs ETF (SDOG).
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 be imperiled value ideas.
With so many market observers highlighting recent upside in value equities, some analysts are increasingly bullish regarding the outlook for dividend payers.
“Dividend-paying stocks tend to cluster toward the value side of the equity market,” says Morningstar analyst Dan Lefkovitz. “Companies in slower-growing sectors like consumer defensive, utilities, energy, and financial services, are likelier to pay out cash to shareholders than in faster-growing areas such as technology.”
Value stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales). While they generally have solid fundamentals, value stocks may have lost popularity in the market and are considered bargain priced compared with their competitors. Still, SDOG is relevant today.
While they generally have solid fundamentals, value stocks may have lost popularity in the market and are considered bargain-priced compared with their competitors. Value fans believe this time may be different for value stocks, pointing to improving investment sentiment measures, abating fears of a recession, rebounding corporate profits, and lessening trade tensions between the U.S. and China. Furthermore, value stocks are now trading at some of their most attractive prices in years as the growth/value gap is as wide as it’s been in decades.
Over the near-term, strength in cyclical sectors would likely hasten the dividend/value rebound. Fortunately, the long-term dividend equity outlook remains compelling. The same is true of SDOG, which should benefit as interest rate remain low over the next several years, a scenario that often supports high dividend strategies.
“Meanwhile, the long-term case for dividend payers remains strong,” according to Lefkovitz. “Not only does a significant portion of the long-term total return from equities come from reinvested dividends and dividend growth, but dividend payers have posted a strong track record relative to non-payers and the overall market. Dividend payers tend to be solid, cash-generative businesses. Committing to a regular payout instills discipline.”
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.