The ALPS Sector Dividend Dogs ETF (SDOG ) offers a twofold proposition: above-average income and an avenue for betting on a rebound by the value factor.
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.
Data confirm the value is out of favor, but there’s are some potentially positive implications for the long-term SDOG story.
“Value stocks have been out of favor for a long time. The Russell 3000 Value Index lagged the Russell 3000 Growth Index by a staggering 5.9 percentage points annualized from the end of 2006 through May 2020,” writes Alex Bryan for Morningstar. “That’s enough to try almost any investor’s patience. It’s the longest stretch of underperformance that U.S. value stocks have ever experienced.”
Income and Value
SDOG’s equal-weight methodology also means the fund allocates about 30% of its weight to the defensive consumer staples, healthcare, and utilities sector, a combination that can reduce volatility. Dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return.
However, the equal-weight methodology and its ties to overweighting rate-sensitive sectors isn’t a reason to gloss over SDOG.
“Interest rates could have a disproportionate effect on certain value-leaning sectors, but it isn’t clear that falling interest rates are a net negative for broad value portfolios,” according to Bryan. “For example, low spreads between long- and short-term rates tend to hurt banks. However, low interest rates tend to help utilities and real estate investment trusts, which are highly leveraged and have more stable cash flows than most.”
Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return. And there’s still a case for SDOG’s value effect.
“Despite their flaws, simple valuation ratios can point to higher expected returns if investors either 1) systematically underestimate the cash flows of stocks trading at low valuations (and overestimate how well pricier stocks will do) or 2) apply higher discount rates to the cash flows of stocks trading at lower valuations as compensation for risk,” according to Bryan.