Hallmarks of the quality factor include robust profitability, strong cash flow, and durable, growing dividends. Those characteristics usually aren’t had on the cheap.
With that in mind, it’s unusual (and compelling) when quality stocks, including the lineup of the WisdomTree US Quality Dividend Growth Fund (DGRW), are attractive on valuation, but that is the case today.
DGRW’s underlying index is the WisdomTree US Quality Dividend Growth Index (WTDGI), which is rooted in return on equity (ROE) and return on assets (ROA). To be sure, those are coveted traits, and they usually aren’t found on cheap stocks. Something else to consider: While DGRW is a passive fund, it’s dynamic, and that helps it weed out negative equity names while occasionally finding some value.
“After its annual reconstitution, WTDGI improved both its profitability and valuation metrics. ROA improved to 8.50% and ROE improved by over 100 basis points to 28.75%. Both significantly exceed comparable metrics for the S&P 500 Index,” says Alejandro Saltiel, WisdomTree associate research director.
Making DGRW all the more attractive as investors mull over allocations for 2022 is the fact that although there’s a bit more value to be had here, the exchange traded fund’s growth profile improved following the aforementioned rebalance.
“Along with improved quality metrics, the post-rebalance basket shows higher implied growth as measured by earnings retention times ROE. WTDGI also has a 0.84% higher dividend yield than the S&P 500 with a 13% discount in forward valuation,” adds Saltiel.
DGRW allocates nearly a quarter of its weight to technology. Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) combine for almost 10% of the fund’s weight, and those aren’t inexpensive names. Beyond that, consumer staples — a sector that’s rarely cheap — accounts for 19% of the ETF’s roster. Add those factors up, and it’s a wonder that DGRW and quality are favorably valued, but as Saltiel notes, that is the case today.
“WTDGI is trading at its largest forward valuation discount versus the S&P 500 Index since its inception in April 2013,” Saltiel points out.
That comes with consumer discretionary — another sector that’s usually expensive — seeing the largest increase in DGRW following the recent rebalance. That sector now accounts for 11.47% of the fund’s weight, making it DGRW’s fifth-largest sector exposure.
Relative to the S&P 500, DGRW is overweight on healthcare, industrials, and staples.
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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.
