With just a few weeks left in 2019, now is an appropriate to evaluate some of the strategies that have been working this year. Among individual investment factor, quality, oft-overlooked compared to growth, low volatility and value, shoots to the top of the list.
Regarding broader concepts, dividend-paying equities, both foreign and domestic, have been working across developed economies because so many of those countries, including the U.S., are awash in accomodative monetary policies prompting piddly sovereign bond yields. As has been widely noted, there are intimate links between dividend payers, particularly the growers, and the quality factor.
Few, if any domestic dividend exchange traded funds (ETFs) epitomize the payout growth/quality relationship on par wit the WisdomTree U.S. Quality Dividend Growth ETF (DGRW). DGRW's yield as of the close U.S. markets on Monday, Nov. 25 was just 2.30%. That's better than what investors get on the S&P 500 or 10-year Treasuries, but far from high-yield territory.
In other words, although it ignores dividend increase streaks, a popular hallmark of prosaic dividend growth ETFs, DGRW is in fact a dividend growth play, not a high-yield strategy.
“This exchange-traded fund favors highly profitable stocks with durable competitive advantages that should have the capacity to raise their dividends and generate attractive returns over time,” said Morningstar in a recent note. “But it ignores firms' records of past dividend growth, which reflects managers' willingness to raise their dividends and the stability of the underlying businesses.”
Not High-Yield And That's OK
With the S&P 500 yielding just 1.80% and 10-year Treasuries lobbing off an even lower 1.76%, it's easy for investors to be seduced by high dividend concepts these days.
Tempting or not, high dividend stocks come with their own set of risks, not the least of which those big yields were accrued for a simple reason: the share prices declined. Additionally, excessive dividend yields can be a sign that a company is financially burdened by its payout and some type of negative action, be it cut or suspension, is looming.
DGRW eschews high dividend names and emerges with a value tilt that a emphasizes stocks' future dividend paying (and raising) capabilities.
“It weights each stock based on the value of dividends it is expected to pay over the next year,” said Morningstar. “This causes the fund to overweight stocks that are cheap relative to their peers based on dividends and to double down on stocks as they become cheaper, when it rebalances. Similarly, it trims positions as they become more expensive.”
Data confirm that DGWH has been a winner since coming to market in May 2013.
“So far, the fund's approach has worked well. From its inception in May 2013 through October 2019, it beat the Russell 1000 Index by 34 basis points annually, with comparable volatility,” according to Morningstar.
Of course, a picture is worth a thousand words and the chart below confirms DGRW's out-performance of a pair competing dividend ETFs that focus on dividend increase streaks.
Sector Exposure Matters
While some analysts have attributed DGRW's long-term out-performance of rival strategies to its industrial exposure, the more likely catalyst is a technology sector weight that has consistently ranged above 20% (currently 23.20%) since inception.
That's above-average relative to older dividend ETFs. Due to not emphasizing dividend increase streaks, DGRW was one of the first dividend funds to have material weights to Apple (AAPL) and Microsoft (MSFT). Today, those stocks combine for 11.57% of the fund's roster, underscoring the perks of DGRW's focus on return on assets and return on equity.
“The strategy's dual focus on return on assets and return on equity offers a more holistic picture of each firm's profitability,” said Morningstar. “While firms can boost return on equity through financial leverage (debt financing), return on assets strips out this effect and offers a cleaner measure of operating efficiency.”
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.