SOJE - SDOG: ETF With A Simple And Sensible Strategy But Average Result

2023-04-24 05:44:38 ET

Summary

• ALPS Sector Dividend Dogs ETF is a well-diversified fund with a 4% yield.
• It is cheap regarding aggregate valuation ratios.
• Quality and volatility metrics are underwhelming.
• So is return since inception, but the fund has outperformed in the last 3 years.
• Dividend growth is steady, but average.

This article series aims at evaluating ETFs regarding the relative past performance of their strategies and quality metrics of their current portfolios. Holdings and weights change over time, so updated reviews are posted when necessary.

SDOG strategy and portfolio

ALPS Sector Dividend Dogs ETF ( SDOG ) has been tracking the S-Network Sector Dividend Dogs Index since 06/29/2012. It has 50 holdings, a dividend yield of 4.24% and a total expense ratio of 0.36%. Distributions are paid quarterly.

As described by ALPS , the fund “ applies the 'Dogs of the Dow Theory' on a sector-by-sector basis using the S&P 500 Index as its starting universe of eligible securities. SDOG provides high dividend exposure across 10 sectors of the market by selecting the five highest yielding securities in each sector and equally weighting them ”. The GICS classification has 11 sectors, but real estate is excluded from the universe. The underlying index has no qualitative screen and is entirely based on dividend yield.

SDOG is almost exclusively invested in US-based companies (95.6% of asset value), 42% in large caps and 52% in mid-caps. The fund is equal weighted in constituents and in GICS sectors except real estate. All positions are set in equal weight on rebalancing dates, but they may drift with price action. The heaviest sector now is utilities (10.57%) and the lightest one is financials (8.82%). The next chart compares the sector breakdown with the S&P 500 ( SPY ).

The top 10 holdings, listed below, represent 21.6% of asset value. These are the components with the highest momentum since the last rebalancing. Regarding weights, risks related to individual companies are limited.

Performance

Since inception in June 2012, SDOG has lagged the benchmark SPY and its competitor Schwab U.S. Dividend Equity ETF ( SCHD ) by about 2% in annualized return. It also shows a higher risk in drawdown and volatility (standard deviation of monthly returns).

However, SDOG has outperformed in the last 3 years (next chart).

The annual sum of distributions has increased by 68.6% between 2013 and 2022, from $1.18 to $1.99 per share. In the same time, the cumulative inflation has been about 27% (based on CPI). SDOG dividend growth has beaten inflation and the growth trend has been quite steady (next chart). On the downside, the annualized growth rate of 5.98% is average. In the same time, the annualized dividend growth rate of SCHD has been 12.3%.

Comparing SDOG with a reference strategy based on dividend and quality

In previous articles, I have shown how three factors may help cut the risk in a dividend portfolio: Return on Assets , Piotroski F-score , and Altman Z-score .

The next table compares SDOG since inception with a subset of the S&P 500: stocks with an above-average dividend yield, an above-average ROA, a good Altman Z-score, a good Piotroski F-score and a sustainable payout ratio. It is rebalanced quarterly to make it comparable with a passive index.

Past performance is not a guarantee of future returns. Data Source: Portfolio123

SDOG lags the S&P 500 dividend quality subset by 4% in annualized return. However, the fund's performance is real, whereas the subset performance is hypothetical. My core portfolio holds 14 stocks selected in this subset (more info at the end of this post).

Scanning SDOG portfolio

SDOG is much cheaper than SPY regarding the usual ratios (see next table). The price/sales ratio is especially low.

Data: Fidelity

The fund holds 50 stocks, of which 14 are risky regarding my metrics. In my ETF reviews, risky stocks are companies with at least 2 red flags among: bad Piotroski score, negative ROA, unsustainable payout ratio, bad or dubious Altman Z-score, excluding financials and real estate where these metrics are unreliable. Here, risky stocks weigh about 28% of asset value, which is a bad point.

According to my calculation of aggregated quality metrics (reported in the next table), the Altman Z-score, Piotroski F-score and ROA are inferior to the benchmark. This points to a below-par portfolio quality.

Takeaway

ALPS Sector Dividend Dogs ETF invests in the five S&P 500 stocks with the highest dividend yield in every GICS sector, except real estate. This strategy is similar to the “Dogs of the Dow”. The fund follows an equal-weight methodology limiting risks related to individual companies and to sector rotations. Valuation ratios are attractive, but quality metrics are below par. Historically, SDOG has lagged the S&P 500 and Schwab U.S. Dividend Equity ETF, but it has beaten them in the last 3 years. The fund's dividend growth beats inflation, but it is far behind SCHD. Higher yield generally comes with higher risk, and SDOG is no exception: it shows a higher volatility and deeper drawdowns than the benchmark and SCHD.

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