SDOG ETF: A 4% Dividend Yield Is Not Enough for What This Dividend Is Sacrificing (SDOG)

Investment thesis

ALPS Dog Profits Foundation (NYSEARCA:SDOG) is the ultimate paradoxical play. By ranking near the bottom of the large-cap value category based on critical factors such as growth, momentum, quality and sentiment, SDOG is likely to generate interest from investors who are drawn to it. Dividend yield of 4%. However, today’s article highlights the sacrifices it takes to invest in SDOG for only a marginally higher income. To do this, I’ll discuss the basics of two large-cap value ETFs that yield close to 4% and show that at least one of them should provide you with a safer, higher income source over the long term. As a result, I do not recommend SDOG, and I look forward to explaining why in more detail below.

SDOG Overview

Strategy discussion

SDOG tracks the S-Network Sector Dividend Dogs Index and selects the top five dividend-paying stocks in the S&P 500 in… Every sector (except real estate). The index is weighted by its 50 holdings, but it’s worth noting that there are no additional screens of financial health beyond those required for entry into the S&P 500.

The index provider highlights the absence of these qualitative screens in the third section above, and while it is described as a positive advantage of keeping the index “pure play” on dividend yield, I see the advantage negatively. Earnings growth, consistency and coverage monitors are essential to avoiding yield traps. Moreover, the increase in yield is only marginal. I expect alternatives like the Schwab US Dividend Equity ETF (SCHD) to yield 3.91% going forward compared to 4.00% for SDOG. I’ll explain later what SDOG shareholders are giving up for the extra 0.09% in dividend yield.

Performance summary

SDOG launched on June 29, 2012, and has an expense ratio of 0.36% as of April 1, 2023. Since August 2012, it has generated a total return of 217.74% compared to 374.74% and 284.93% for the SPDR S&P 500 ETF (SPY) and SPDR S&P 500 Value ETF (SPYV), respectively. SDOG was also more volatile, resulting in significantly lower risk-adjusted returns (Sharpe and Sortino ratios).

I included SPYV as a benchmark because SDOG belongs strongly to the large-cap value category. While SDOG’s dividend yield is much higher (4.16% vs. 1.81%), 67% of the total yield is a lot to sacrifice. Furthermore, investors in 2013 who chose to reinvest dividends will outperform income and capital gains with SCHD and the WisdomTree US High Dividend ETF (DHS).

However, this does not mean that SDOG is doomed to failure. On the contrary, it has performed well compared to other large-cap value ETFs. Consider these annual returns and rankings from 2013 to 2023:

• 2013: 34.20% (#6/35)
• 2014: 15.00% (#6/39)
• 2015: -3.19% (#30/42)
• 2016: 22.48% (#4/48)
• 2017: 12.66% (#53/58)
• 2018: -11.40% (#56/64)
• 2019: 24.00% (#55/67)
• 2020: -0.35% (#52/69)
• 2021: 24.60% (#54/73)
• 2022: -0.21% (#13/80)
• 2023: 4.21% (No. 71/86)

If anything, SDOG is an inconsistent performer, capable of first or fourth quarter returns but rarely in between. As such, it is necessary to conduct a thorough analysis before declaring SDOG due for conversion, so let’s do that next.

SDOG analysis

The following table highlights selected key metrics for SDOG’s 25 largest holdings, totaling 53.99% of the portfolio. I have also included summary measures for DHS and SCHD in the bottom rows.

Here are four notes to take into consideration:

1. The SDOG index’s dividend yield is 4.36%, which is the weighted average yield of all 50 holdings. After subtracting the fund’s expense ratio of 0.36%, I estimate shareholders would net 4.00% at current prices. In comparison, DHS and SCHD have expected dividend yields of 4.07% and 3.91%, so there’s not much difference. However, DHS and SCHD properties showed more the desire To increase dividends, as evidenced by the five-year annual dividend growth rates (6.21% and 8.64% vs. 4.86%). In addition, SDOG, DHS, and SCHD have the following earnings scores, which I derived using a search for alpha factor scores and converting them to a ten-point scale.

• Earnings Consistency: 7.51 / 7.73 / 8.46
• Earnings growth: 6.28 / 6.54 / 8.13
• Earnings Yield: 7.62 / 6.85 / 6.91
• Earnings Safety: 6.62/6.85/7.29

These results reveal how SCHD offers the best earnings consistency and dividend growth potential. It also has a slightly higher dividend security score, which is partly related to its lower dividend payout ratio (62.85%). Notably, SDOG ranks last in all categories except yield.

2. SDOG trades at forward earnings of 16.26x using the simple weighted average method or 12.82x using the harmonic weighted average method, which you’ll see on sites like Morningstar. Regardless of your preferred method, this is the 13th review out of 97 large-cap value ETFs I track. Additionally, its value score of 6.25/10, derived from research on alpha factor scores, is the fourth best and most influential because it represents sector differences.

3. All three ETFs have flat growth rates, an unfortunate reality for income investors. However, this was not always the case. in April 2022 review From SDOG, the earnings per share growth rate was 10.69%, but now, that it -0.86%, with Wall Street analysts expecting lower earnings for 27/50 holdings. Given how analysts at FactSet are forecasting double-digit earnings growth in 2025 for most sectors, ETFs with consistent earnings growth should struggle.

4. SDOG achieved a win score of 8.36/10 compared to 7.76/10 and 9.28/10 for DHS and SCHD. For this reason, I do not recommend DHS as an alternative. However, despite SCHD’s recent poor performance, I still believe it is one of the best large-cap value ETFs available because it contains high-quality stocks. Growth is the problem, but as I mentioned, that’s the case with many ETFs. In other words, if you insist on owning a high-yield stock fund, you might as well get something else out of it. In the case of SCHD, this is quality.

Finally, I’d like to highlight how SDOG ranks against other large-cap value ETFs based on ten key factors. This table summarizes many of the points already discussed, but you can use it as a quick overview to help identify the ETF’s strengths and weaknesses. In this case, SDOG should only perform well in value-oriented markets, as it ranks below average on all other factors.

Investment recommendation

SDOG is a sector-neutral fund with an expected dividend yield of 4.00%. Following a “Dividend Dogs” strategy that picks the five highest-yielding stocks in each of the 10 GICS sectors (excluding real estate), SDOG is also deeply discounted but offers little chance of success in markets where value stocks are out of favour. . While SDOG is not doomed to fail, I am frustrated with the sales growth rates and earnings estimated by voters, and believe they will suffer in the near term. SCHD, while not perfect, offers much greater exposure to the quality factor and a competitive expected dividend yield of 3.91%, which is my preference between the two. Thank you for reading, and I look forward to your comments below.