Dividend Growth ETFs Take Hold Over Broader Market

Many investors may be unaware that dividend growth ETFs have held up the fallout from the pandemic, outperforming the broader market. That in mind, there are opportunities in these ETFs that have had an impact on companies maintaining, suspending, or cutting their dividends.  

ETF Trends spoke with Jeremy Schwartz, WisdomTree’s Global Head of Research, about dividend growth ETFs, with thoughts on how healthcare and tech dividend companies function as two sectors that have fared much better than more cyclical sectors such as energy. Additionally, there are reasons why the WisdomTree US Quality Dividend Growth Fund (DGRW) has held up even though dividend cuts and suspensions have increased recently.

Schwartz noted one of the major stories concerning the sustainability of dividends. In particular, there’s the dividends futures market, which prices out how much the market expects dividends to change.

In March, they were expected to fall over a third this year. Today, however, the dividend stream is so much more diversified (only 16% of total dividends from any one sector). That in mind, as of the beginning of May, it is still being priced at about a 14% decline, with estimates of 8 years for the dividend to come back to their all-time high.

“I think the dividend futures market may be called an obscure little market, but it’s still pretty pessimistic on the help with corporate America and its anticipated dividend level,” Schwartz said.

Related: ETF Trends Office Hours Featuring Jeremy Schwartz – Wednesday, May 6, 2020

Going on what’s actually been seen so far, WisdomTree has an index of all the dividend paying stocks. There are many cuts, along with much growth. About 40% of the dividend stream has seen growth, despite some meaningful reductions. Adding all of this together, in general, the aggregate stream has declined around 3%.

Large caps, on the other hand, have declined much less, about 1%. However, there’s been a more significant concentration in small caps. Mid-caps have seen about a 10% decline, while small caps have declined 16%. Roughly, that has coincided with what’s going on in stock prices.

The question becomes whether or not prices are reflecting what’s going with dividends more than reality. Within the whole dividend universe, though, one of the themes, as Schwartz explains, is, “The more in large caps you’ve been, the better your performance has been. And the more in the growth-oriented sectors, the better you’ve been.”

Getting back to DGRW, which has been doing well thanks to large cap exposure, part of that comes down to weighting by total dividends instead of by yield. There’s also the sector make-up, which is more tilted in the tech sector, which has helped it hold up, as well as the meaningful exposure to healthcare.

To learn more about WisdomTree’s DGRW ETF, visit https://www.wisdomtree.com/etfs/equity/dgrw.