Many value stocks are also dividend payers, and with both concepts moving higher this year, the ALPS Sector Dividend Dogs ETF (SDOG) stands out as a potent avenue for advisors and investors looking for compensation to wager on what could be a stout value comeback.
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.
Data confirm SDOG is a compelling idea in this environment, for both income-starved investors and value hunters alike.
“At 20 times forward earnings, the S&P 500 is in the 90th percentile of its valuation over the past 30 years, per data from Goldman Sachs’ chief U.S. equity strategist, David Kostin,” reports Nicholas Jasinski for Barron’s. “But even investors feeling valuation vertigo can still find pockets of value in this market. Financials go for a 30% discount to the S&P 500, at just the ninth percentile of their historical relative range. Energy stocks, at a 13% discount to the index, are only at their 21st percentile relative valuation. Technology stocks, which trade at a 16% premium to the index, are at their 45th percentile over the past 30 years.”
The Value Thesis
Value stocks tend to trade at a lower price relative to their fundamentals (including dividends, earnings, and sales).
Over the near-term, strength in cyclical sectors could 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 rates remain low over the next several years, a scenario that often supports high dividend strategies.
“Evercore ISI strategist Dennis DeBusschere is focused on sectors’ cash-return yields, which represent the total dividend and stock-buyback payouts to shareholders. Relative to history, industrials, materials, energy, and financials all look attractive on that basis,” according to Barron’s.
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).
For more on cornerstone strategies, visit our ETF Building Blocks Channel.
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.