High dividend strategies like the ALPS Sector Dividend Dogs ETF (SDOG ) are back in style, and the value resurgence and low interest rates are just two reasons why.
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.
History shows that after high dividend stocks lag the broader market by wide margins, as was the case last year, they often enjoy long subsequent periods of outperformance.
“High dividend stocks lagged the S&P 500 by 30%. This trend began well before 2020, with valuations on dividend stocks cheapening over the past four years while broad equities appreciated,” according to BlackRock research. “While history won’t necessarily repeat itself, the last time we saw this big of a performance differential was in 1999. Thereafter, dividend stocks outperformed equities for the next seven years.”
SDOG Holds Allure This Year
Adding to the allure of high dividend strategies is that many companies are growing more confident in their ability to service and grow dividends heading into 2021.
Companies are growing more confident in growing dividends again, even as another surge in Covid-19 cases threatens earnings. According to FactSet estimates, S&P 500 per-share earnings are expected to bounce 22% in 2021—to above 2019 levels.
“We see not only a valuation opportunity but an income one as well. With rates hitting new lows in 2020, many companies’ stocks now offer dividend yields that are higher than their respective corporate bonds yields. Moreover, dividends offer growth potential over time whereas bond coupons are fixed,” notes BlackRock.
Another point in SDOG’s favor is its equal-weight sector methodology, meaning it underweights some groups that are currently struggling and overweights energy, which is soaring relative to the S&P 500.
For more on cornerstone strategies, visit our ETF Building Blocks Channel.