Many growth stocks, particularly communication services and technology fare, have long duration cash flows. That’s a positive when interest rates are faltering, but with Treasury yields rising as they are today, some previously beloved stocks are falling out of favor.
Advisors can combat that situation with dividends and 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.
Many dividend names are also value stocks – a group usually more resilient to rising rates.
“My suspicion is that rising yields—bond market pain—amount to a greater headwind for growth stocks than value stocks, owing to the effect that higher discount rates have on distant cash flows,” notes Jeff Weniger, WisdomTree head of equity strategy.
How to Beat the Rising Rates
The model portfolio’s high-quality focus may also help dividend growers outperform, or at least do less poorly than the broader markets during weaker periods.
“It’s still early days, but the stock market’s response to the bond sell-off has been to take out growth stocks,” says Weniger. “For sure, not all of the market’s leaders are in trouble: Google-parent Alphabet is still near its highs, while Microsoft’s decline since mid-February is just a blip on the long-term chart. Then again, I am not sure many people consider that one to be a growth stock anymore.”
The model portfolio’s emphasis on dividend growers is particularly relevant in today’s market environment. Dividend-growing companies are also high quality names. Steady dividend payouts have also helped produce improved risked-adjusted returns over time.
Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock-full of stocks that have the potential to be future sources of dividend growth.
Dividend “growers typically don’t boast burly yields like yielders do, though they have their advantages. Notably, companies that regularly boost their dividends are usually profitable and financially healthy,” adds Morningstar analyst Susan Dziubinski.
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.