At a time when equity and government bond yields are low and playing defense is a priority for many investors, the ALPS Sector Dividend Dogs ETF (SDOG ) could be a relevant addition for conservative investors seeking added income, including retirees.
Nonetheless, with the prospect of interest rate cuts and slowing global growth, it seems that safety with respect to income is what investors are preferring, which is leading them to high-dividend ETFs.
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.
“If you look at current yields on high-quality bonds and certainly cash, they’re very, very low today,” said Morningstar analyst Christine Benz. “Raw materials for decent returns from those securities just aren’t there, given that current yields have historically been a pretty good predictor of what you might expect from those asset classes.”
The features of dividend-yielding equities are obvious with regard to the sustained income aspect, but more importantly, given the current market environment, they also possess risk management features that could mute the effects of volatility.
SDOG does an admirable job of mixing cyclical and defensive exposure, potentially mitigating some of the bumpiness that comes along with investing in economically sensitive stocks.
“In addition to the growth that investors can get from equities, if they are long-term holders of equities, one thing we know by examining market history is that dividends have historically composed a huge share of the market’s return over time,” notes Benz. “So you need stocks because you need growth and you also need dividend-paying stocks because they’ve contributed such a big percentage of that growth over time.”
In addition to above-average positioning in cyclical and value equities, SDOG yields 4.54%, which is well above what investors earn on Treasuries or broader domestic equity benchmarks.