With various companies, such as Boeing (BA), industries asking for Uncle Sam's assistance in the wake of the coronavirus pandemic, shareholder rewards are under intensifying scrutiny.
Companies like airlines and Boeing that gorged themselves on buybacks during the recently deceased bull market are scrapping those plans either voluntarily or at the federal government's behest. Buybacks are now so out of style, even financially sturdy companies such as Intel (INTC) are eliminating the practice. As for dividends, which are major contributors of long-term total returns, the energy patch is becoming a dividend graveyard of sorts while other industries are joining the dividend offense party.
All of that is to say investors looking for equity income, be it with stocks or exchange traded funds, need to be selective in the current environment. Choosy dividend investors may just want to choose the WisdomTree U.S. Quality Dividend Growth ETF (DGRW).
No, DGRW hasn't been an angel during this month's market meltdown. The fund is sporting a month-to-date loss of 19.61% as of March 25. That's bad, but it's also nearly 1,000 basis points less bad than the high-yield Dow Jones U.S. Select Dividend Index confirming that even today's low interest rate climate, opting for growth over yield has its advantages.
Dividend Outlook: Cloud With a Chance of Cuts
After years of annual records, there's a good chance S&P 500 dividend growth will contract this year or only be negligibly higher, cementing the allure of DGRW's dependability. If S&P 500 dividends do decline this year, that would be somewhat remarkable because it would mark just the seventh time in the last 63 years that has happened with 2009 being the most recent occurrence.
“Yes, some dividends will be cut in the upcoming downturn. The market is pricing that in,” said WisdomTree in a recent note. “Many large-cap energy stocks have dividend yields around four times the average dividend yield in the market, indicating these yields are highly suspect.”
Due to the spate of hotel, mall and store closures across the U.S. due to the COVID-19 outbreak, real estate investment trusts (REITs), another high-yield group, could also see negative payout action. Fortunately, DGRW allocates barely more than 1% of its total weight to the energy and real estate sectors.
Investors fretting that 2020 could be a 2009 redux on the dividend front may want to consider DGRW as well and sector allocations again tell the story. In alphabetical order, consumer staples, healthcare and technology stocks, broadly speaking, are unlikely to be dividend offenders and those groups have taken on increasing importance in the domestic dividend landscape.
Those three sectors combine for roughly 54% of DGRW's weight.
“Technology, Health Care and Consumer Staples—tend to be more immune against dividend cuts and likely three sectors with growth this year,” notes WisdomTree. “If aggregate dividends were to decline like they did in ’09, it is also important to remember that it took only 4 years before dividend levels reached new highs after the global financial crisis.”
Five of DGRW's top 10 technology holdings, a quintet combining for about 14% of the fund's weight, are members of the Nasdaq-100 Index. Right now, that's relevant because that benchmark is beating the S&P 500 by almost 600 basis points this month.
Additionally, there is the matter of quality, one of the cornerstones of DGRW's methodology. At a time when investors are worried about strained balance sheets, the quality factor is performing noticeably less bad than other factors, including supposedly less volatile value. That could be another sign DGRW is positioned to lead when stocks rebound.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.