• Average Dividend Yields Matter; the average dividend yield (current income) over the period can be just as important as the dividend growth (growth of income). The WisdomTree MidCap Dividend Index (WTMDI) was able to outperform both market cap-weighted broad indexes due to its higher average yield of 3.66%, and benefit from valuation changes over the period, even though it exhibited the lowest dividend growth over the period. Given the high average yield over the period, the lower dividend growth rate makes sense if you use the same finance theory logic as above, because a higher payout ratio (lower retention rate) can lead to a lower dividend growth rate (assuming everything else is equal). But the income generated from WTMDI over the period would have been double that of any of the indexes displayed above, which helped drive its total returns higher through the power of compounding.
Mid-Cap Valuations
We find it very interesting that even after the impressive gains above, the average valuation change for the mid-cap indexes displayed above was slightly negative over the period, indicating that the U.S. mid-cap market has actually become less expensive on a P/D ratio basis. WTMEI saw the greatest reduction in valuations, with its P/D ratio contracting by over 17%, as a result of dividends growing considerably faster than prices over the period. We take comfort in the fact that the overall valuations have not become overly stretched, but we still feel it is important to be mindful of fundamentals and to focus on indexes that follow a disciplined process of adjusting weight based on changes in relative value as well as in the relationship between fundamentals and price growth.
Important Risks Related to this Article
Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.