• Dividend Growth Indexes Saw Higher Growth Than Yield-Focused Index – WTDGI and WTSDG had an advantage of over 4 and 2.5 points, respectively, compared to the WisdomTree Equity Income Index (WTHYE). Although WTHYE’s median dividend growth lagged over the period, it is important to remember that WTHYE screens for securities with higher dividend yields instead of focusing on future growth potential, so the Index will typically have a higher dividend yield than WTDGI and WTSDG.
Dividend Growth Indexes Tend to Provide Different Exposures
WisdomTree believes the combined ranking of earnings growth and quality factors is a key element of our dividend growth methodology process of identifying stocks with the highest potential to increase dividends. It is important to understand that screening dividend-paying equities based on earnings growth and quality factors can create an index with substantial sector differences compared to a broadly focused index or an index that screens based on dividend yield.
The Growth Sectors: WisdomTree’s dividend growth Indexes are currently over-weight in the more cyclical sectors such as Information Technology, Consumer Discretionary and Industrials, compared to broad and yield-focused dividend indexes.
The Higher-Yielding Sectors: On the other hand, yield-focused indexes are typically over-weight in defensive sectors, for example Utilities and Telecommunication Services, which are characteristically some of the highest-yielding sectors, compared to the broad or dividend growth indexes.
Conclusion
There is no question that investors are drawn to the idea of dividend growth—potentially even more than in the past, due to rising interest rates. While there is no way to know with certainty what will happen in the future, I believe that our dividend growth methodology shows that it can help identify stocks with above-average prospects for dividend growth—as it did at the last rebalance. I believe this dividend growth potential becomes even more important if we continue to see a rise in interest rates like we witnessed in 2013.
Important Risks Related to this Article
Dividends are not guaranteed and a company’s future abilities to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time. Fixed income investments are subject to interest rate risk; their value will normally decline as interest rates rise. In addition, when interest rates fall, income may decline. Fixed income investments are also subject to credit risk, the risk that the issuer of a bond will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer’s ability to make such payments will cause the price of that bond to decline.