There are a number of popular dividend growth indexes (and ETFs, which are designed to track their performance after costs, fees and expenses) with very strict requirements for the history of consecutive years companies must raise their dividends to be eligible for potential inclusion as constituents. For instance:
• Mergent Dividend Achievers Select Index has a requirement that a firm must raise its dividend consecutively for 10 years to be eligible for inclusion.
• S&P High Yield Dividend Aristocrats Index requires 20 consecutive years of dividend increases in order for constituents to gain eligibility.
As a result of these stringent requirements, it will be a long time before these indexes will own many of the financial firms that cut their dividends during the global financial crisis. At WisdomTree, we created a family of broadly inclusive Indexes of dividend payers that do not screen out dividend initiators (such as, for example, Apple, which initiated a dividend during the 2012 calendar year) or companies that are returning to paying dividends after temporary cuts or suspensions (as was the case for J.P. Morgan, Wells Fargo and other large U.S. financials).
We believe being broadly inclusive of the dividend-paying opportunity set can potentially lead to a better capture of the market’s dividend growth. Wells Fargo is the latest company to illustrate this point—neither the Mergent Dividend Achievers Select Index nor the S&P High Yield Dividend Aristocrats Index can include Wells Fargo until 2022 at the very earliest, provided the company meets the relevant screening criteria at that time. With the financial sector recovering, we may expect to see financials be one of the leading contributors to dividend growth of the market—and backwards-looking dividend growth screens may counterintuitively hamper the respective indexes’ ability to capture that growth.
The following WisdomTree ETFs hold the companies discussed in this article: WisdomTree Total Dividend Fund (NYSEArca: DTD) and WisdomTree LargeCap Dividend Fund (NYSEArca: DLN).
Jeremy Schwartz is director of research at WisdomTree Investments (NasdaqGM: WETF). This post was republished with permission from the WisdomTree blog.
1Source: Bloomberg.
2Source: Bloomberg.
3Source: Bloomberg.
4Source: Bloomberg.
5Data refers specifically to firms in the WisdomTree Dividend Index as of 11/30/2007.
6Based on the 11/30/2009 screening date of the WisdomTree Dividend Index.
7Based on the annual screening date of the WisdomTree Dividend Index (11/30/2012).
8Source: Bloomberg, as of the 11/30/2012 Index screening date. Universe is the WisdomTree Dividend Index.