There are dozens of dividend growth exchange traded funds on the market today, but many of those products access dividend growth in various fashions. The WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ: DGRW) is an example of an ETF that employs crucial financial metrics in search of stocks with the capacity to consistently boost payouts.
DGRW includes companies with high long-term earnings-growth forecasts for the next three to five years and weights components based on the value of dividends they are expected to pay over the next year. The ETF tracks the WisdomTree U.S. Dividend Growth Index (WTDGI), which evaluates companies based on earnings quality, return on assets (ROA) and return on equity (ROE).
In many cases, dividend growers can be considered quality stocks with more stability and less volatility than high dividend names.
WisdomTree’s quality dividend growth indexes, including DGRW’s underlying benchmark, “utilize both ROE and return on assets (ROA) as part of the selection requirements. Using ROA as a screening criterion penalizes firms using leverage to drive ROE,” according to the issuer.
Betting With Buffett
DGRW’s methodology includes some metrics prized by Warren Buffett when he and his team make additions to Berkshire Hathaway’s sprawling equity portfolio.
“Based on Buffett’s preferred measure of business performance, return on net tangible equity, DGRW has a higher level of profitability than Berkshire’s latest equity portfolio,” according to WisdomTree.
Buffett has long been an advocate of avoiding companies with high debt burdens, a view that dividend investors should embrace because heavily indebted companies could eventually cut or suspend dividends to service debt.
“Also key to Buffett’s investment model is his requirement that companies do not employ excessive levels of debt,” notes WisdomTree. “DGRW’s assets-to-equity ratio—a measure of how much of a company’s assets are financed with debt and other liabilities—is significantly lower than Berkshire’s portfolio. Berkshire’s higher assets-to-equity ratio and lower ROE and ROA are driven by large positions in Financials which operate with higher levels of assets and liabilities than other sectors. At the time of writing, 9.5% of DGRW’s weight is in the Financials sector.”
The $2.75 billion DGRW allocates a combined 39.53% of its weight to the technology and industrial sectors.
For more on smart beta ETFs, visit our Smart Beta Channel.
Tom Lydon’s clients own shares of DGRW.