SDOG: High Yield, Good Value, Questionable Quality

This dividend ETF article series aims at evaluating products regarding the relative past performance of their strategies and quality metrics of their current portfolios. As holdings and weights change over time, I post updated reviews when necessary.

SDOG strategy and portfolio

The ALPS Sector Dividend Dogs ETF (SDOG) has been tracking the S-Network Sector Dividend Dogs Index since 06/29/2012. It pays quarterly dividends with an annual distribution yield of 3.57% as of writing. The total expense ratio is 0.4%.

As described on S-Network Global Indexes website, the index is composed of 50 stocks of the S&P 500. It “selects the five stocks with the highest dividend yields in each of the ten sectors that make up their corresponding universes, assuring diversification across all sectors”. There is no other filter.

SDOG is mostly in US-based companies (98%), 43.1% in large caps, 55% in mid-caps and 19.2% in small caps. The top 10 holdings, listed below, weigh 22% of asset value. None of them weigh more than 2.5%, so the risk related to individual stocks is limited.

By the underlying index rules, the fund is equal weighted in stocks, and also in all GICS sectors except real estate on every rebalancing day. After some price drift, the heaviest sector is now energy (about 10.7%) and the lightest one is consumer discretionary (9.0%).

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

Data: Fidelity

Performance

Since inception in June 2012, SDOG has lagged SPY by about 3 percentage points in annualized return, with a higher risk measured in drawdown and volatility (standard deviation of monthly returns).

The next chart plots the equity value of $100 invested in SDOG and SPY since SDOG inception.

SDOG was almost on par with SPY until the correction of February 2018, then it has underperformed.

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 a dividend yield above the average of their respective indexes, an above-average ROA, a good Altman Z-score and a good Piotroski F-score. It is rebalanced annually 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 and quality subset. However, SDOG’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 with quality metrics

SDOG holds 50 stocks, of which 13 are risky stock 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 less relevant. Here, risky stocks weigh about 27% of asset value: it is a lot.

According to my calculation of the weighted quality metrics reported in the next table, SDOG quality is very inferior to the benchmark.

Takeaway

SDOG invests in high-yield S&P 500 stocks. It picks the five highest yields in every sector except real estate, without any other filter, and follows an equal-weight methodology. This results in a portfolio whose aggregate valuation ratios look very attractive, but quality metrics are significantly below the benchmark. Keeping an equal weight in 10 sectors with 5 positions in each sector is an efficient way to limit the risk related to individual stocks and sector rotation cycles. Historically, SDOG performance was similar to SPY in the first 6 years after inception, then it started lagging, like many dividend ETFs. It has outperformed SPY in the last 12 months by a short margin (17.37% vs. 15.64%). SDOG may be a product of interest for investors looking for high yield with a balanced sector exposure. However, higher yields generally come with higher risks, and SDOG is no exception: dividend ETFs using quality screening like VIG (my review here), RDVY (review), DGRW (review) have a better track record in risk-adjusted performance. SDOG has a very low rating at Morningstar (1 star): I think it’s a bit harsh, but it is certainly not among my preferred dividends ETFs. For transparency, a dividend-oriented part of my equity investments is split between a passive ETF allocation (SDOG is not part of it) and my actively managed Stability portfolio (14 stocks), disclosed and updated in Quantitative Risk & Value.