A client of mine who is an avid reader of investment media recently discussed a unique fund she had come across that has several alluring qualities for income investors.
I had heard of the ALPS Sector Dividend Dogs ETF (SDOG) before … but never fully researched it until she brought it to my attention.
SDOG was introduced just more than two years ago and has since amassed over $800 million in total assets. Seeing that kind of quick success alone, I guessed the fund must have a unique strategy or compelling value proposition that makes it stand out above similar offerings in the category.
Sure enough, it does.
SDOG – The Dogs of the Dow Revisited
The original Dogs of the Dow Theory focuses on selecting 10 of the highest dividend paying stocks in the Dow Jones Industrial Average on an annual basis. SDOG does an admirable job of taking that one step further to include a more diversified and balanced subset of companies.
This dividend ETF selects the five highest-yielding holdings from each of the 10 sectors within the S&P 500 Index. Each holding is then equal weighted so that every company has a similar pull on the total return of the fund. The end result is a portfolio of 50 large-cap stocks that includes a high degree of diversification among every sector.
Often times, dividend funds are skewed toward a specific area of the market, such as utilities, consumer staples or energy companies. However, SDOG provides you with the opportunity to own equal segments of the economy in one package. In addition, because ALPS selects from some of the largest and most liquid stocks in the world, the holdings are generally high-quality companies. This includes well-known dividend payers such as Intel (INTC), Lorillard (LO) and AT&T (T).
SDOG has a current 30-day SEC yield of 3.2%, which ever so slightly exceeds the 3.15% yield of the category benchmark iShares Select Dividend ETF (DVY). In addition, both funds share a similar expense ratio of 0.4%.
During the past year, SDOG has actually outperformed DVY and the SPDR S&P Dividend ETF (SDY) by a fair margin. This ETF has provided a total return of nearly 25% during the past 52 weeks.
This outperformance in SDOG is likely due to larger exposure to the technology, healthcare and telecommunications sectors, which have performed strongly over that time frame. DVY is overly weighted toward utilities; SDY has underperformed despite its significant exposure to the resurgent financial arena.
The one drawback to SDOG is that dividends are paid on a quarterly basis. I typically prefer equity income funds that offer monthly dividends to smooth out the payment stream and allow for greater frequency of distributions. One competitor I recently profiled that does offer monthly income is the Global X Super Dividend U.S. ETF (DIV).
Nevertheless, SDOG should certainly be on your watch list of dividend ETFs that include a reasonable expense ratio, higher-than-average yield and unique index construction methodology. This fund can certainly be used as a core holding within the context of a conservative income portfolio to gain market correlation and yield.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. Searching for income? Download our latest special report on REITs, MLPs, and preferred stocks: The Ultimate ETF Income Guide.