Although concerns about rising interest rates have spiked in
recent weeks, investors still want yield. Now, it is a matter of
what asset classes they turn to in an effort to generate
Yields on 10-year Treasurys were 2.19 percent as of Monday, up
from 2.13 percent on June 3,
according to Treasury Department data
, but the reality is even at 2.2 percent, the yield on Treasurys
is nothing to write home about.
Given the still anemic yields on assets that are perceived to
be risk-free, it is not surprising that investors have been
paying up for higher yields elsewhere. The ongoing hunt for yield
has predictably prompted
talk of a dividend bubble
, particularly as valuations on some favorite dividend sectors
have become stretched.
"A number of analysts believe dividend-paying stocks with the
highest dividend yields are expensive compared to other parts of
the equity market. A rise in the long-term interest rates in the
U.S. put some pressure on the performance of stocks with the
highest dividend yields in May," said WisdomTree Research
Director Jeremy Schwartz in a research note.
Said another way, investors may want to consider different
spins on dividend
rather than paying up for yield with traditional sector and
dividend funds. For example, the Utilities Select Sector SPDR
), despite an unusual bout of weakness over the past month, still
trades with a P/E ratio of almost 15.6. That is toward the higher
end of the sector's historical valuation, but investors still
the 3.85 percent dividend yield
Same thing goes for the Consumer Staples Select Sector SPDR
). A 2.35 dividend yield is still better than Treasurys and just
a few extra basis points difference
leads to a P/E of almost 18
These elevated valuations also indicate that investors are
willing to pay up for dividend growth, or more specifically, a
stock's past track record of increasing payouts. Combine the hunt
for yield with adulation for dividend increase streaks and it is
not surprising that investors are enamored by ETFs such as the
Vanguard High Dividend Yield Indx ETF (NYSE:
) and the SPDR S&P Dividend ETF (NYSE:
However, the stretched valuations indicate investors should
want more than high yields. Additionally, the backward-looking
nature of past dividend increases and the emphasis by some ETFs
on that theme could put investors in a position where they are
missing out on
future sources of dividend growth
A Solution The newly minted WisdomTree U.S. Dividend Growth
) could be one ETF that solves conundrum of not paying up for
dividend growth while offering investors exposure to potentially
robust sources of future payout increases.
DGRW is not yet a month old, but the fund has already
accumulated almost $15 million in assets under management with an
annual fee of 0.28 percent. More important than superficial
statistics is DGRW's sector exposure, which features an almost 21
percent weight to technology.
For more than five years,
tech has been a pivotal driver of U.S. dividend
, yet some of the most popular dividend ETFs, such as those
mentioned earlier in this piece, have scant allocations to the
Importantly, investors do not have to pay up for access to
tech dividends, as DGRW's underlying index, the WisdomTree U.S.
Dividend Growth Index, proves.
"The WisdomTree U.S. Dividend Growth Index had long-term
earnings growth expectations that were about 5 percentage points
higher than those of the WisdomTree Equity Income Index, as of
May 31, 2013. Simply put, this means that, relative to their P/E
ratios, one is not paying a premium P/E multiple to get access to
the higher long-term earnings growth expectations of the U.S.
Dividend Growth index,"
For more on ETFs, click
(c) 2013 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.
Profit with More New & Research
. Gain access to a streaming platform with all the information
you need to invest better today.
Click here to start your 14 Day Trial of Benzinga