As 10-Year Treasuries Crest 1.60%, Consider This Dividend-Generating Portfolio

Yields on 10-year Treasuries topped 1.60% this morning, presenting another difficult headwind for growth stocks. As recent market action confirms, few corners of the equity market are immune to rising government bond yields, but some corners of the dividend-paying realm are worth considering.

Advisors can tap into that theme with the Global Dividend Model Portfolio, which is part of WisdomTree’s Modern Alpha series of model portfolios.

“This model portfolio seeks to provide capital appreciation and high current dividend income, through a globally diversified set of WisdomTree’s dividend income oriented equity ETFs. The model strives to deliver dividend income in excess of the global benchmark of equities,” according to WisdomTree.

Against the backdrop of rising Treasury yields, the Global Dividend Model Portfolio is relevant due to broad exposure to mid- and small-cap dividend payers, giving the portfolio a value tilt at a time when growth stocks are languishing.

Go Small for Income and Rising Rate Protection

Interestingly, some small- and mid-cap dividend stocks offer another advantage: solid management teams that are unlikely to take on leverage or make acquisition missteps for fear that they could need to cut payouts to compensate for those mistakes.

“Over the long run, we have the data to support that mid- and small-cap dividend payers tend to outperform non-dividend payers and tend to do so with significantly less volatility,” writes WisdomTree analyst Matthew Wagner. “Following a year where non-dividend payers outperformed dividend payers by more than 30% in both markets—the widest margin in the past two decades—investors may want to consider that the interest rate environment that was a tailwind to growth stocks in 2020 is unlikely to reoccur in 2021, and it may become a headwind should rates continue to rise.”

Over a long-term horizon, mid caps have outperformed the competition. Since 1996, the S&P MidCap 400 generated an average annual return of 10.4%, compared to 7.3% for the S&P 500 and 9.7% for the SmallCap 600.

Historical data indicate that even modest allocations to mid cap stocks can improve long-term returns compared to portfolios that don’t feature mid cap exposure.

The model portfolio’s dividend dependability is all the more important at a time when small cap stocks are joining their large cap peers in becoming ‘dividend offenders’. Along with the focus on smaller companies, investors should also look to dividend growers to potentially enhance long-term returns.

For more on how to implement model portfolios, visit our Model Portfolio Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.