Dividend growth investing is always a solid idea, although there are times that this more conservative style is destined to be overlooked as more adventurous concepts come into fashion.
Today, however, dividend growth and strategies such as the WisdomTree US Quality Dividend Growth Fund (DGRW) are all the more meaningful. DGRW, which tracks the WisdomTree U.S. Quality Dividend Growth Index, is up an admirable 17.2% year-to-date and is displaying less annualized volatility than the S&P 500. In fact, the WisdomTree exchange traded fund has been less volatile than the benchmark domestic equity gauge over the past three years.
Reduced volatility is a compelling trait. So is the fact that domestic dividends are growing again — a trend that DGRW capitalizes on. However, there are more sources of allure with this fund, including DGRW’s positioning as an alternative to traditional cap-weighted funds as core ideas in investor portfolios.
“We believe companies with a history of increasing dividends provide a good starting place in a search for fundamentally strong and growing companies. Steady dividend growth often follows consistent profitability and shareholder-focused management,” says Kevin Caron of Washington Crossing Advisors in a note submitted to Barron’s.
Another advantage offered by DGRW is that it’s ideally designed to capitalize on the forward-looking nature of dividend growth. DGRW accomplishes that by focusing on quality, return on assets (ROA), and return on equity (ROE).
“A dividend growth perspective looks beyond today’s yield and considers other factors, such as quality, growth, risk, and value. A track record of dividend increases can be viewed as a tangible signal by a company’s management that they are both willing and able to boost a payment to shareholders,” adds Caron.
DGRW also has qualities that many high-dividend strategies lack. While those competing funds focus on yield, this means that large weights to sectors with slow growth prospects or that are highly capital-intensive, such as real estate and utilities. Conversely, DGRW has a combined 46% weight to technology and healthcare stocks — two sectors rich with robust free cash flow and strong payout growth histories.
“A recent study by Ned Davis Research, shows that return was higher and volatility lower among companies that raised their dividends compared with ordinary dividend payers (that may or may not have raised the dividend), companies that do not pay dividends, and especially dividend cutters for the period of January 1973 to December 2020. As we have shown in other research notes, rising dividend strategies outperform high dividend strategies as the latter effectively function as bond substitutes,” concludes Caron.
Bottom line: History indicates that dividend growth is a winning strategy.
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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.
