In a low yield, income-hard-to-come-by environment, the ALPS Sector Dividend Dogs ETF (SDOG) remains a compelling idea among ETFs by virtue of its 4.58% dividend yield, but there are other reasons to consider this high dividend strategy.
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 imperiled value ideas.
With an overweight position in utilities stocks, SDOG has the potential to rebound in the waning stages of 2020 if that sector corrects an interesting anomaly against financial services stocks.
“Both utility and financial stocks have underperformed the S&P 500 this year. Utilities are down nearly 9% and banks are down 18%, compared with the large-cap index’s 8.5% advance,” reports Alexandra Scaggs for Barron’s. “That isn’t the way things normally work, as Morgan Stanley points out in a Monday note.”
Opportunities With SDOG
SDOG equally weights 10 of the 11 S&P 500 sectors with real estate excluded. As such, its 9.98% utilities weight is more than triple that of the S&P 500. That could be a positive trait at a time when utilities stock appear poised for near-term upside.
The defensive and yield-generating utilities play is garnering greater attention as a growing number of people are looking to global central banks, including the Fed, to lose monetary policies and execute accommodative measures to obviate a potential economic downturn in response to the coronavirus outbreak.
“And interest rates are low. Treasury yields have tumbled this year as the pandemic caused millions of job losses, brought travel to a halt, and prompted the Federal Reserve to cut short-term interest rates to zero. The 10-year yield is trading around 0.7% and the 30-year yield is around 1.5%, down from 1.9% and 2.3% at the beginning of the year,” according to Barron’s.
Utilities are typically more stable stocks since the demand for their services, notably electricity and gas, is steady from both consumers and businesses. Moreover, in a lower-for-longer yield environment, utilities come with more attractive above-average dividends. SDOG’s components from the 10 S&P 500 sectors are the five highest-yielding members of those groups.
Other high dividend ETFs include the SPDR S&P Dividend ETF (SDY), iShares Select Dividend ETF (NYSEArca: DVY), and the 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.
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