Backward-Looking Strategies May Not Be Inclusive
These examples highlight an important facet of dividend investing: companies with a long history of dividend growth may not be the key drivers of tomorrow’s dividend growth. Historically, for example, technology companies have been associated with reinvesting the bulk of their profits into their businesses to finance future growth, but more recently, some have favored share buybacks, dividend initiation or dividend increases. Since this trend in technology stocks is fairly recent (Cisco just began paying in 2011, for instance, and Apple in 2012), backward-looking dividend growth screens with five-, ten- or twenty-year periods may not fully capture these dividend initiations or increases. Microsoft will have nearly ten consecutive years of dividend increases in 2014, marking the first time it can be included in indexes that screen for companies that have ten consecutive years of dividend growth.
Can You Capture Broad Dividend Growth with Low Technology Exposure?
The WisdomTree U.S. Dividend Growth Index is designed to screen firms based on certain fundamental metrics that I believe are associated with a greater potential for future dividend growth. In essence, the methodology strives to identify a basket of companies that can deliver above-average dividend growth, rather than just selecting the dividend growers of yesterday. As a result of the methodology, the WisdomTree U.S. Dividend Growth Index currently has an over-weight allocation toward the technology sector, compared to its benchmark index (NASDAQ US Dividend Achievers Select Index). The current technology exposure as of September 24, 2013, is below:
• WisdomTree U.S. Dividend Growth Index (WTDGI)—20.5%
• NASDAQ US Dividend Achievers Select Index (DVG)—5.9%
Forward-Looking Dividend Growth Has Led Recently
To compare how the different selection methodologies translate to dividend growth in underlying components, I examined the median dividend growth of the underlying components of the WTDGI and the DVG indexes.
• In the recent one-year period, there was an almost 8-percentage–point difference in the median dividend growth rates, with the WTDGI index leading the way. Over three and five years, the difference was 2.4% and 3.7% higher, respectively.