One of most popular questions of 2012 was, “Are dividend-paying stocks expensive?” The WisdomTree rebalance is designed to adjust weights on a concept of relative value. We examine the overall market valuation characteristics of the broad dividend-paying U.S. equity market (WisdomTree Dividend Index) as compared to the broad U.S. equity market, defined here as the Russell 3000 Index. This analysis showed:
• The WisdomTree Dividend Index (WTDI) Exhibits Lower Price-to-Earnings (P/E) Ratios: Ultimately, in 9 of the 10 sectors, WTDI exhibited lower P/E ratios than the Russell 3000 Index, with Financials being the lone exception.
• Price-to-Cash Flow Ratio: In 9 of the 10 sectors, WTDI exhibited lower price-to-cash flow ratio than the Russell 3000 Index.
• This valuation analysis shows that while certainly there are exceptions to this on an individual stock basis, in aggregate we do not find evidence that dividend payers have become expensive compared to the broader market.
Conclusion
The WisdomTree annual rebalance is a key element of the added value of WisdomTree’s Index methodology. We interpret this year’s aggregate 16% dividend growth of the U.S. dividend stream as a very positive indicator of underlying market fundamentals—that companies, despite ongoing tax uncertainty going into 2013—still managed to grow their dividends. AAPL was an example of a very large-scale initiation. It is at each annual Index screening and rebalance that WisdomTree engages in a disciplined process to adjust weight based on changes in relative value—specifically the measure of relative value implied by the relationships of price growth versus dividend growth. The newly refreshed weights and constituents of WisdomTree’s U.S. Dividend Indexes thus provide important benchmarks for gauging the performance of different cross-sections of the U.S. dividend-paying universe.
1Refers to the 20 largest payers of indicated dividends in the WisdomTree Dividend Index, which also comprise the 20 largest Index weights.
2Bloomberg, as of 11/30/2012.
Jeremy Schwartz is director of research at WisdomTree Investments (NasdaqGM: WETF). This post was republished with permission from the WisdomTree blog.