Tag Archives: stocks

SDOG: Great Yields With Reasonable Sector Allocations

Summary SDOG offers an exceptional dividend yield of 3.54%. The expense ratio is a bit too high for my tastes. The sector allocation is solid as either a first allocation or a secondary allocation in the dividend growth portfolio. Investors should be seeking to improve their risk adjusted returns. I’m a big fan of using ETFs to achieve the risk adjusted returns relative to the portfolios that a normal investor can generate for themselves after trading costs One of the funds that I’m researching is the ALPS Sector Dividend Dogs ETF (NYSEARCA: SDOG ). I’ll be performing a substantial portion of my analysis along the lines of modern portfolio theory, so my goal is to find ways to minimize costs while achieving diversification to reduce my risk level. Expenses The expense ratio is a .40%. This is too high for my tastes. Dividend Yield The dividend yield is currently running 3.54%. For the retiree or income focused investor that is looking for strong dividend yields, the yield on this fund is excellent. Holdings I put grabbed the following chart to demonstrate the weight of the top several holdings: (click to enlarge) I would ignore the very top weighting in the chart because I’m not convinced that it is a long term location. It may simply be an artifact of the time when I grabbed the chart. The individual holdings have a ton of great dividend champions. General Electric (NYSE: GE ) has been a disappointment to shareholders over the last several years, but the dividend yield is still very high and it isn’t surprising to see it included in dividend indexes. The next thing that I like to see is the presence of both Altria Group (NYSE: MO ) and Phillip Morris (NYSE: PM ). This portfolio is loading up on the sin stocks. Should we consider GameStop (NYSE: GME ) a sin stock? I think the presence of so many video games may be reducing the productivity of younger people as much as any other single factor in the economy. If we were to go all the way down the bottom of the list we would even see Freeport-McMoRan (NYSE: FCX ) on the list which is a little interesting after they had a massive dividend cut. Of course, the price also fell far enough that the dividend yield came back 1.66%. That isn’t strong, but it does represent the exceptional loss shareholders have endured. Since I’ve got some Freeport-McMoRan in my portfolio, I’m well acquainted with the pain other shareholders have endured. I’m a little surprised they aren’t making their play on BHP Billiton (NYSE: BHP ) or Rio Tinto (NYSE: RIO ) for substantially stronger dividend income if they intend to hold stocks in the mining sector as a source of dividend income. Sectors This is a great sector allocation. They went with a fairly even weighting strategy. Since I like going overweight on consumer staples and utilities, I would see this as being ideal for a secondary dividend ETF allocation in the portfolio once the investor is getting overweight on those sectors. As a secondary dividend ETF this is offering excellent sector diversification to go with the very strong yield. Even consider the fund as a first allocation, the positions are still pretty reasonable. I would prefer to use a lower allocation to the basic materials sector, but perhaps that is just the voice of an investor that has been burned by Freeport-McMoRan. For the investor that believes mining materials will have a price recovery within the next few years, this heavy allocation would be ideal. Volatility The ETF has almost perfectly matched the S&P 500 for volatility since inception. Using returns from July 2012 to the present the annualized volatility for the fund is 12.3% compared to 12.5% for the S&P 500. The max drawdown has been a little higher at 13.6% compared to 11.9%. I wonder how much of that was due to the weight of the materials sector. Conclusion This is a pretty good ETF if investors are able to look past the dividend yield. I find a couple of the choices strange for generating dividend income, but the portfolio works as a whole and the relatively even allocation looks a reasonable choice that makes it easier to slip SDOG into a portfolio that already has some major positions filled.

FVD: Great Sector Allocations For This Dividend Growth ETF

Summary FVD offers a dividend yield of 2.17%, which is fairly low for being included in the discussion of dividend ETFs. The top several holdings include heavy exposure to the major oil companies. The expense ratio is quite dreadful. The sector allocations look great for a dividend ETF, which seems ironic given the weak yield on the fund. The First Trust Value Line Dividend ETF (NYSEARCA: FVD ) looks great for sector allocations, pretty good for individual companies, and weak for yield, and painful for the expense ratio. That is one of the most mixed bags I’ve found when reviewing dividend ETFs. I’ve found ones that are good, ones that seem poorly designed, and ones that are all around average. I rarely see such strong contradicting signals though. Expenses The expense ratio is a .75% on the gross level and .70% on the net level. Is it any surprise I’m not loving the expense ratio? Dividend Yield The dividend yield is currently running 2.17%. That seems strange for a dividend ETF, but I’ve seen low yields on dividend ETFs before so I won’t dwell on it. Holdings I grabbed the following chart to demonstrate the weight of the top 10 holdings: I love seeing Exxon Mobil (NYSE: XOM ) as a top holding. Investors may be concerned about cheap gas being here to stay, but I think money in politics will be around decades (centuries?) longer than cheap gas. Bet against big oil at your own peril. I can say the same about liking Chevron (NYSE: CVX ) and ConocoPhillips (NYSE: COP ). These companies offer investors a good way to benefit from high as prices which would generally be a drag on the rest of the economy and on the personal expenditures of consumers. As we go farther down the list there are a couple of high quality equity REITs incorporated into the portfolio. I should note that while these allocations are fairly far down the list, their allocations are still higher than .58% and the second heaviest weighting is only .63%, so being far down on the list doesn’t mean much in terms of weighting. The high quality equity REITs I see here are Realty Income Corporation (NYSE: O ) and Public Storage (NYSE: PSA ). Realty Income Corporation is a monthly pay equity REIT that runs a triple net lease structure. In short, they are buying up commercial properties and renting them out to businesses. The company has exceptionally high credit standards and screens applicants to reduce their risk of having renters default on the contract. Public Storage on the other hand has a fairly simple business in terms of renting out storage space. This can be a fairly attractive space because there aren’t too many REITs competing in the space which reduces the need for price based competition. Sectors (click to enlarge) The very heavy allocation to utilities is great for investors that don’t already have the exposure in their portfolio. Utilities tend to have a lower correlation with the rest of the domestic market and generate significant income for shareholders which causes them to also have some correlation with the bond markets since investors interested in income are able to pick between bonds and utilities. The high allocation to financials is a bit higher than I’d like to see since equity REITs are only a few of the positions. Most of the financials exposure is coming from the more traditional sources such as banks. Heavy exposure to consumer staples is another positive aspect in my opinion since it makes the portfolio more resistant to selling off during negative market events. Telecommunications usually gets a much heavier weight in dividend portfolios due to the presence of AT&T (NYSE: T ) and Verizon (NYSE: VZ ), but the weighting strategy for this fund giving most equity positions allocations around .6% has resulted in those two companies combining to be only 1.14% of the portfolio. Suggestions I wouldn’t mind seeing this portfolio show a slightly higher allocation to a few dividend champions such as Pepsi (NYSE: PEP ) or Coke (NYSE: KO ). I wouldn’t mind seeing the oil companies get slightly higher allocations either. The final modification would be increasing the presence of sin companies in the portfolio by overweight companies like Altria Group (NYSE: MO ). Of course, this runs contrary to the ETF’s strategy of aiming to have their holdings be roughly equally weighted. Conclusion Overall I like the portfolio that has been created, but the weighting methodology creates the possibility of material changes in the allocation from period to period. There are several companies that were selected by the ETF’s methodology that also meet my definitions for attractive dividend payers, but I’d really like to see the strategy implemented with a lower expense ratio even if that required sacrifices such as less frequent rebalancing of the portfolio.

Q4 2015 Investment Style Ratings For ETFs And Mutual Funds

Summary Our style ratings are based on the aggregation of our fund ratings for every ETF and mutual fund in each style. The primary driver behind an Attractive fund rating is good portfolio management (stock picking) combined with low total annual costs. Cheap funds can dupe investors and investors should invest only in funds with good stocks and low fees. At the beginning of the fourth quarter of 2015, only the Large Cap Value and Large Cap Blend styles earn an Attractive-or-better rating. Our style ratings are based on the aggregation of our fund ratings for every ETF and mutual fund in each style. See last quarter’s Style Ratings here. Investors looking for style funds that hold quality stocks should look no further than the Large Cap Blend and Large Cap Value styles. Not only do these styles receive our Attractive rating, they also house the most Attractive-or-better rated funds. Figures 4 through 7 provide more details. The primary driver behind an Attractive fund rating is good portfolio management , or good stock picking, with low total annual costs . Attractive-or-better ratings do not always correlate with Attractive-or-better total annual costs. This fact underscores that (1) cheap funds can dupe investors and (2) investors should invest only in funds with good stocks and low fees. See Figures 4 through 13 for a detailed breakdown of ratings distributions by investment style. All of our reports on the best & worst ETFs and mutual funds in every investment style are available here . Figure 1: Ratings For All Investment Styles (click to enlarge) To earn an Attractive-or-better Predictive Rating, an ETF or mutual fund must have high-quality holdings and low costs. Only the top 30% of all ETFs and mutual funds earn our Attractive or better rating. The State Street SPDR Dow Jones Industrial Average ETF (NYSEARCA: DIA ) is the top rated Large Cap Value fund. It gets our Very Attractive rating by allocating over 51% of its value to Attractive-or-better-rated stocks. International Business Machines (NYSE: IBM ) is one of our favorite stocks held by DIA and receives our Attractive rating. Over the last decade, IBM has grown after-tax profit (NOPAT) by 8% compounded annually while doubling NOPAT margins. In addition to strong NOPAT growth, IBM has improved its return on invested capital ( ROIC ) to 12%, from 9% in 2005. Despite the strength in its business, IBM shares remain undervalued. At its current price of $140/share, IBM has a price to economic book value ratio ( PEBV ) of 0.8. This ratio implies that the market expects IBM’s NOPAT to permanently decline by 20%. Even if IBM can only grow NOPAT by 2% compounded annually for the next five years , the stock is worth $211/share today – a 51% upside. The ProFunds Small Cap Fund (MUTF: SLPSX ) is the worst rated Small Cap Blend fund and overall worst-rated style mutual fund. It gets our Very Dangerous rating by allocating 20% of its value to Dangerous-or-worse-rated stocks and 60% held in cash. Making matters worse, it charges investors total annual costs of 5.50%. Why should investors pay such high fees when over half their assets are held in cash? Denny’s Corporation (NASDAQ: DENN ) is one of our least favorite stocks held by Small Cap ETFs and mutual funds and earns our Dangerous rating. Over the last five years, the company’s NOPAT has declined by 7% compounded annually. The company currently earns a 6% ROIC. Despite declining profits, DENN has soared over the past five years and shares are up nearly 250%. This price appreciation has left DENN significantly overvalued. To justify its current price of $11/share, Denny’s must grow NOPAT by 10% compounded annually for the next 15 years . This expectation seems rather optimistic given Denny’s failure to grow profits over the past five years. Figure 2 shows the distribution of our Predictive Ratings for all investment style ETFs and mutual funds. Figure 2: Distribution of ETFs & Mutual Funds (Assets and Count) by Predictive Rating (click to enlarge) Figure 3 offers additional details on the quality of the investment style funds. Note that the average total annual cost of Very Dangerous funds is almost four times that of Very Attractive funds. Figure 3: Predictive Rating Distribution Stats (click to enlarge) * Avg TAC = Weighted Average Total Annual Costs This table shows that only the best of the best funds get our Very Attractive Rating: they must hold good stocks AND have low costs. Investors deserve to have the best of both and we are here to give it to them. Ratings by Investment Style Figure 4 presents a mapping of Very Attractive funds by investment style. The chart shows the number of Very Attractive funds in each investment style and the percentage of assets in each style allocated to funds that are rated Very Attractive. Figure 4: Very Attractive ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 5 presents the data charted in Figure 4 Figure 5: Very Attractive ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 6 presents a mapping of Attractive funds by investment style. The chart shows the number of Attractive funds in each style and the percentage of assets allocated to Attractive-rated funds in each style. Figure 6: Attractive ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 7 presents the data charted in Figure 6. Figure 7: Attractive ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 8 presents a mapping of Neutral funds by investment style. The chart shows the number of Neutral funds in each investment style and the percentage of assets allocated to Neutral-rated funds in each style. Figure 8: Neutral ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 9 presents the data charted in Figure 8. Figure 9: Neutral ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 10 presents a mapping of Dangerous funds by fund style. The chart shows the number of Dangerous funds in each investment style and the percentage of assets allocated to Dangerous-rated funds in each style. The landscape of style ETFs and mutual funds is littered with Dangerous funds. Investors in Small Cap Blend funds have put over 57% of their assets in Dangerous-rated funds. Figure 10: Dangerous ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 11 presents the data charted in Figure 10. Figure 11: Dangerous ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 12 presents a mapping of Very Dangerous funds by fund style. The chart shows the number of Very Dangerous funds in each investment style and the percentage of assets in each style allocated to funds that are rated Very Dangerous. Figure 12: Very Dangerous ETFs & Mutual Funds by Investment Style (click to enlarge) Figure 13 presents the data charted in Figure 12. Figure 13: Very Dangerous ETFs & Mutual Funds by Investment Style (click to enlarge) Source Figures 1-13: New Constructs, LLC and company filings D isclosure: David Trainer and Thaxston McKee receive no compensation to write about any specific stock, sector or theme.