Dividend Dogs

07/26/2016 9:00 am EST

Focus: STOCKS

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

So far, 2016 is proving to be a tough year to make money in US stocks; here, I discuss two strategies that generate consistent gains, even as the broader market treads water, suggests Nicholas Vardy, editor of The Alpha Investor Letter.

While the Dividend Aristocrats seek out the best in the market, the “Dividend Dogs” strategy bets on the worst — and with surprisingly good results.

The Dogs of the Dow are the 10 of the 30 companies in the Dow Jones Industrial Average that have the highest dividend yield. The strategy is simple; invest in the 10 highest-yielding stocks in the Dow, and rebalance at the end of each year.

A fundamentally contrarian strategy, the Dogs of the Dow invests in currently out-of-favor stocks, which are expected to rebound. Once they do, you replace them with other, newer Dogs that are temporarily out of favor.

Today, there is no single ETF that replicates this strategy. Perhaps the strategy is just too simple. Enter the ALPS Sector Dividend Dogs ETF (SDOG), which applies the “Dogs of the Dow” theory on a sector-by-sector basis to stocks trading in the S&P 500.

Although this strategy does not have the long track record of the S&P Dividend Aristocrats Index, the idea behind it — and its performance — makes the approach compelling.

SDOG invests in the five highest-yielding securities in each of the 10 sectors of the market. This generates a portfolio of 50 stocks with a focus on the large-cap market.

By weighing each sector equally at the stock and sector level, SDOG provides diversification while avoiding sector biases.

Like the Dogs of the Dow strategy to which it owes its fundamental insight, the idea is contrarian. Higher-yielding stocks in the S&P 500 are expected to recover, bringing their yields in line with the market, and leading to outsized gains.

Year to date, the ALPS Sector Dividend Dogs ETF has posted a total return (including dividends) of 12.97%, far above the S&P 500 Index’s 2.55%.

For income-oriented investors, the fund’s 3.24% yield bests the S&P 500 Index’s yield of 2.1%. SDOG charges a reasonable 0.40% in annual fees.

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By Nicholas Vardy, Editor of The Alpha Investor Letter

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