ETF Trends CEO Tom Lydon discussed the WisdomTree U.S. Quality Dividend Growth Fund (DGRW) on this week’s “ETF of the Week” podcast with Chuck Jaffe on the MoneyLife Show.
DGRW tracks the performance of an index that invests in large- and midcap dividend-paying US common stocks with growth characteristics.
There are preparations in place for inflationary pressures with a quality dividend growing strategy. The coronavirus vaccines are being distributed, and the economy is reopening at the same time as stimulus checks have been sent out, plus talk of trillions in infrastructure spending. These factors point toward an economy heating up.
Since 1957, dividends have grown by an average of 5.7% per year—more than 2% above the inflation rate. This was true during high-inflation periods (the ’70s and ’80s) when inflation averaged more than 6%. It’s also been true during low-inflation periods, such as the last three decades. Looking at the dividend per share of the 20 largest U.S. dividend payers, 17 out of 20 of these companies have had annualized dividend growth greater than 3% over the past five years, well ahead of the Fed’s 2% average inflation target. Several have even grown greater than 10% annualized.
For investors seeking alternative sources of income to fixed income, consider the equity income potential from broadly diversified baskets of U.S. dividend payers.
Why Dividend Growers?
Sustainable dividend income has been an important factor in total equity returns. Since 1936, reinvested dividends have contributed 38% of the total equity return of the S&P 500. Dividend-growing companies are also high quality names. A company’s credit rating provides a convenient composite measure of quality. Only one-fifth as many dividend cutters and eliminators have come from the top quintile of the S&P 500 by credit rating, while nearly five times that number have come from the bottom quintile.
On the other hand, companies in the highest quintile of dividend yield – those whose ability to pay may become stretched in challenging markets – account for more than double the number of dividend cuts and eliminations versus those in the bottom quintile with more modest dividend yields. The highest-quality companies have, however, proven their ability to grow their dividends over time. And they have demonstrated an ability to survive through a range of market environments, even raising dividends after previous recessions. Steady dividend payouts have also helped produce improved risk-adjusted returns over time.
DGRW tracks the WisdomTree U.S. Quality Dividend Growth Index. It’s a fundamentally weighted index that consists of dividend-paying stocks with growth characteristics. The Index comprises the 300 companies in the WisdomTree U.S. Dividend Index with the best-combined rank of growth and quality factors.
The growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three-year historical averages for return on equity and return on assets. The Index is dividend weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share.
Listen to the full podcast episode on the DGRW:
For more podcast episodes featuring Tom Lydon, visit our podcasts category.