NEW YORK (TheStreet) -- One long-standing investment strategy is called the Dogs of the Dow.
At the start of the year, you build a portfolio with the 10 highest-yielding stocks in the Dow Jones Industrial Average and then reconstitute the portfolio a year later. This is a contrarian strategy because stocks with relatively high yields have those high yields because they have underperformed. Last year's laggards, the thinking goes, will be this year's leaders. A year ago ETF provider ALPS launched the ALPS Sector Dividend Dogs ETF ( SDOG), which owns the five highest-yielding stocks from each of the 10 S&P 500 sectors. Each stock in the fund is targeted at a 2% weight, and each sector is targeted at a 10% weight. Since inception SDOG, has outperformed the S&P 500 by three percentage points with a higher yield. Looking to repeat that success of a foreign scale, ALPS last week launched the ALPS International Sector Dividend Dogs ETF ( IDOG). IDOG will target developed countries excluding the U.S. and Canada. Similar to SDOG, IDOG owns the five highest-yielding stocks from each of the 10 sectors, with each stock targeting a 2% weight in the fund and each sector having a 10% weight. IDOG will pay a quarterly dividend, but it too early for any specific yield information. It is worth noting that foreign companies often only pay a dividend once or twice a year so IDOG's payouts could be uneven. The country breakdown is very similar to the iShares MSCI EAFE ETF ( EFA). Japan is the largest country at 18%, followed by the U.K. at 12% and Finland and Australia, each with a bit less than 10%. The country weightings are similar to EFA, which may not be a good thing. The Japanese market was white-hot earlier this year before falling 20% in the last few weeks. The European markets, which make up a bit more than 50% of the fund, have generally not been doing well for a long time. To the extent that the weak performance has been because of poor fundamentals, it may still be a while before the fundamentals in these countries start to improve. Spain's Banco Santander ( SAN) is one of the financial stocks in IDOG. SAN yields 12%, but the stock is down 26% since its January high, far worse than the 15% decline for the iShares MSCI Spain ETF ( EWP). IDOG holding France Telecom ( FTE) (with a 10% yield) is down 21% from its January peak compared to a 3% decline for the iShares MSCI France ETF ( EWQ). Even though those are just examples and not every stock in the fund has that kind of yield, there comes a point in dividend investing where a yield can be too high. A very high yield can often be an indication of a distressed company that might soon cut its dividend. A strategy of buying distressed companies in hopes of a turnaround is valid. but it might not be what a person looking at dividend ETFs has in mind. The dividend dog theory is sound, but if equity markets in Europe and Japan continue to struggle, then it is unlikely that IDOG can do well. At the time of publication, Nusbaum had no positions in stocks mentioned. Follow @randomroger This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.
