Income generation still remains a primary investment objective, but advisors who are also looking for added growth can consider the ALPS Sector Dividend Dogs ETF (SDOG), which has been outpacing the broader markets while providing an attractive yield.

The Dividend Dogs ETF has gained 22.2 percent year-to-date while the S&P 500 Index has increased 18.0 percent. Meanwhile, SDOG offers a distribution yield of around 3.7 percent.

Currently, we are in a period of record dividend growth. The average annual dividend growth rate was 13.59 percent over the past three years. Although, this followed a period of record dividend cuts. In the last ten years, the average annual dividend growth was 7.07 percent, according to WisdomTree data.

After years of hoarding cash, companies are finally letting go and returning some of it back to investors. More notably, technology companies, known for re-investing cash back into the company to fuel growth, have started to issue dividends to shareholders. For example, Apple (AAPL) recently introduced its first dividend since 1996. Moreover, financial companies have paid off government loans incurred during the height of the financial crisis and are now returning to dividend payments.

“Dogs of the Dow”
While focusing on high-yield dividend stocks, the ALPS SDOG ETF follows the well-known “Dogs of the Dow” investment theory but applies it to S&P sectors.

The “Dogs of the Dow” approach was first popularized by Michael B. O’Higgins in 1991. The strategy is based on purchasing the 10 stocks in the Dow Jones Industrial Average with the highest dividend yields. Proponents argue that since large companies do not often alter dividends due to their market price, a company’s high dividend yield relative to its stock price indicates that the business cycle is bottoming out and that prices are about to rebound.

A dividend yield is a function of the annual dividends per share to its share price. Dogs of the Dow theorists argue that since the annual dividends per share stays relatively the same, the share price of a high-yield stock has to rise to bring overall dividend yields down to match other stocks. Essentially, the securities are higher yielding because they have fallen out of favor, but market forces will eventually push yields back in-line with their peers after some price appreciation. Consequently, this type of investment style is seen as more of a dividend-oriented value strategy.

Potential investors should be aware that the Dogs of the Dow strategy only works when companies continue to pay out a steady dividend or even increase their dividends.

The Dividend Dogs ETF
SDOG follows the S-Network Sector Dividend Dogs Index, which screens for high-quality dividend paying stocks and equally weights holdings. The underlying index reconstitutes holdings every year to identify the five highest-yielding securities based on cash dividends paid in each of the S&P 500 10 sectors as of the final trading day of November. Additionally, the index rebalances quarterly to allocate a 10 percent weighting for each sector and a 2 percent weight on each security, providing an equal-weight alternative to the market capitalization weighted methodology.

The ETF’s current top holdings include Seagate Technology (STX) 2.3 percent, Best Buy (BBY) 2.3 percent, Northrop Grumman Corp (NOC) 2.3 percent, Avon Products (AVP) 2.2 percent and Health Care REIT (HCN) 2.2 percent.

Current sector allocations include consumer discretionary 10.1 percent, consumer staples 10.2 percent, energy 9.9 percent, financials 10.0 percent, health are 9.9 percent, industrials 10.7 percent, information technology 10.2 percent, materials 9.2 percent, telecom services 9.6 percent and utilities 9.9 percent.

The Dividend Dogs ETF provides a good way to get in on a stock market rally while generating some extra income on the side. The fund can help advisors garner high yield through a diverse group of high quality stocks from the S&P 500 and potentially capitalize on price appreciation.