ETF Trends
ETF Trends

Some dividend ETFs ended the third quarter showing signs of life, potentially boding well for improved performances in the fourth quarter. That includes the ALPS Sector Dividend Dogs ETF (NYSEArca: SDOG), which gained nearly 4% in September.

SDOG sports an enticing dividend yield of 3.4%, which is well above what investors will find on 10-year Treasuries or the S&P 500. 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 “uses the S&P 500 as its starting universe and plucks the five highest yielding stocks from each of the 10 primary market sectors and equal weights them,” reports ETF Daily News.

Companies that have consistently increased dividends tend to be high in quality and show a strong potential for growth. These dividend growers have been able to withstand periods of market duress, exhibiting smaller drawdowns as investors sold off riskier assets, while still delivering strong returns on the upside, to generate improved risk-adjusted returns over the long haul.

Related: MSCI Introduces Factor-Based ESG Benchmarks

SDOG’s underlying index, which has a weighted average market value of $77.8 billion, allocates about 40% of its combined weight to financial services, energy, healthcare and consumer discretionary stocks. The index has a price-to-earnings ratio of 16, implying a discount to the S&P 500.

“After several quarters of double digit year-over-year earnings growth, the market is still looking expensive. The forward P/E ratio of the S&P 500 still sits at around 19,” according to ETF Daily News. “The forward P/E of SDOG? Just 14. That kind of valuation yields two benefits. First, it can provide some much needed downside protection in the event that the market turns south. Second, buying at that valuation is akin to buying stocks off the bargain rack.”

Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.

Several of SDOG’s holdings have lengthy dividend increase streaks. The $2.2 billion ETF charges 0.4% per year, or $40 on a $10,000 investment.

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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.