Are Dividends Mispriced? An Improved Dividend Outlook | ETF Trends

Following a rough first half of 2020, the outlook for S&P 500 dividends is improving in drastic fashion. The new year could be an ideal time for advisors to reallocate to dividend-paying equities.

The WisdomTree Global Dividend Model Portfolio simplifies that task.

“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 the issuer.

Stocks with steady dividend yields reassure investors of a company’s strong financial health. Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return. Over the past 40 years, companies that boost payouts have proven to be less volatile than their counterparts that cut, suspended, or do not initiate or raise dividends.

Are Dividends Mispriced?

Adding to the allure of the Global Dividend Model Portfolio is mispricing in the dividend market. Futures indicate S&P 500 payouts will decrease by 5% next year, but in a recent note, Goldman Sachs strategists led by David Kostin call for a 5% increase.

“Dividend futures contract indicate $54/shares in 2023, while Goldman’s forecast is for dividends to reach $69/share by that period,” according to Seeking Alpha. “Adding to that opportunistic setup, the Goldman analysts highlight that dividends tend to generate a ‘superior’ risk-adjusted return to cash equities given their lower volatility.”

Investors should consider quality dividend growth stocks that typically exhibit stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders, and management team conviction in their businesses. Many of the ETFs in the WisdomTree portfolio are littered with companies exhibiting those traits. An improving economy brightens the 2021 dividend outlook.

“Goldman expects the vaccine distribution efforts by mid 2021 should help real GDP growth reach 5%, which itself is 120bps above the consensus for growth,” notes Seeking Alpha. “The analysts also point to historical annualized growth in dividends, which, since the early 1950s, never dipped below 2.2% CAGR, while dividend futures are pricing in an average annual dividend growth from 2019-2029 of -1%.”

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.