Hunt for Dividends Should Take Investors to Quality | ETF Trends

In golf, there’s an old saying: “Driving’s for show, putting’s for dough.” Interestingly enough, it can be applied to dividend investing when changed to, “Yield’s for show, growth is for dough.”

Translation: High dividend yields are seductive — particularly in today’s low-yield environment. However, payout growth is what investors can rely on for the long term, and it’s a venerable sign of quality. Those factors aren’t easy to find with small-cap stocks, but the mission isn’t impossible, as proven by the WisdomTree U.S. SmallCap Dividend Growth Fund (NasdaqGM: DGRS).

“One of the keys to successful dividend investing is separating the wheat from the chaff—finding stocks with secure payouts that can grow consistently and over the long haul,” reports Lawrence Strauss for Barron’s. “Some of the highest-yielding shares, though tempting at first blush, can lead to trouble, notably cuts or suspensions and big capital losses.”

Owing to the fact that there are fewer small-cap dividend payers than there are in the large-cap space, yields are particularly seductive with smaller stocks. However, quality is harder to come by. DGRS offers the latter while trouncing prosaic small-cap benchmarks in the yield department. For example, DGRS sports a dividend yield of 1.79%, or nearly 100 basis points more than the comparable metric on the widely followed Russell 2000 Index.

“Another potential plus for quality stocks: Besides offering solid and growing dividends, many sport attractive valuations and trade at a discount to the Russell 1000 index,” according to Barron’s.

Of course, dividend growth is rooted in sustainability. Investors allocating to this effect want to know that the payout they’re owed this year will be delivered. Not only that, but they want to know that dividends can steadily grow over time. That latter point is all the more relevant in today’s high inflation climate.

To that end, the DGRS methodology is pertinent. The fund tracks the fundamentally weighted WisdomTree U.S. SmallCap Quality Dividend Growth Index. That index is dividend-weighted, unlike so many dividend benchmarks, which focus on yield. DGRS components are ranked using growth and quality factors.

DGRS has deep cyclical value, as financial services, industrial, and consumer discretionary names combine for over two-thirds of the fund’s weight, indicating that it’s a credible option if value stocks surge in 2022.

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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.