Maybe 2015 will be just like last year when nearly every market forecaster predicted interest rates would rise only to be proven wrong. Or maybe the Federal Reserve will finally proceed with at least one rate increase.
If rates do in fact rise, investors can find protection in dividend growth stocks and exchange traded funds. History proves as much. From 1972 through 2012 companies that initiated or consistently raised dividends outperformed and were less volatile than the companies either did not pay, cut or kept dividends stagnant, according to Ned Davis Research. [Dividend Growth Via ETFs]
Still four months shy of its second anniversary, the WisdomTree U.S. Dividend Growth Fund (NasdaqGM: DGRW) is becoming one of the marquee names among ETFs that purport to offer dividend growth. Of course, that is a claim that dividend investors demand be backed up.
DGRW tracks the WisdomTree U.S. Dividend Growth Index (WTDGI), which evaluates companies based on earnings quality, return on assets and return on equity. From Nov. 30, 2013 to Nov. 30, 2014, the WisdomTree U.S. Dividend Growth Index saw dividend growth of 10.1%, according to WisdomTree data.
“WTDGI displayed a 4 percentage point advantage over the WisdomTree Equity Income Index (WTHYE) in dividend growth. 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,” said WisdomTree Research Director Jeremy Schwartz in a research note out Monday. [Is Your Index Capturing Dividend Growth?]
While DGRW has delivered on the promise of dividend growth, the ETF also has the potential to remain sturdy if rates rise in 2015.
“During periods of rising interest rates, dividend growth stocks have generated higher, and positive, returns with less volatility,” according to Horan Capital Advisors.
The potency of dividends and dividend growth in rising rate environments is not surprising because dividend growth, historically, tops inflation.
Since the early 1970s, when inflation ran as high as 11% per year, aggregate annual dividends of the S&P 500 have grown more than 1,000%, to $34.99 from $3.16 a share, Maxwell Murphy reports for the Wall Street Journal. [Fighting Rate Hikes With Dividend Growth ETFs]
There is a trade-off with DGRW in terms of yield. With no exposure to utilities or telecom stocks, DGRW’s 30-day SEC yield is just 1.92%, but that is about where 10-year Treasury yields closed Monday. However, DGRW does deliver its dividend on a monthly basis and the ETF’s largest sector weight is 20% to consumer discretionary. Discretionary is one just two sectors (financial services is the other) expected to post double-digit dividend growth this year.
“There is no question that investors have been drawn to the idea of dividend growth—potentially even more than in the past—due to a potential rise in 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,” adds Schwartz.
WisdomTree U.S. Dividend Growth Fund
Todd Shriber owns shares of DGRW.