Dividends have been a major boon for investors over the last few months, with current income offering portfolios cover in volatile markets. While there are a slew of strategies that offer investors exposure to dividend-paying companies, investors may want to check out a fund that looks at firms based on their future dividend potential rather than looking backwards at past dividends. One candidate to fill that role could be a dividend growth ETF like the WisdomTree US Quality Dividend Growth Fund (DGRW).
Dividends offer current income, sure, but savvy investors may ask whether they can hold out in recessions — much like the earnings recession that market watchers are anticipating in either the first or second half of this year. Although some dividend-paying firms do struggle, many others do manage to perform, with dividend growth funds specifically generating the most attractive long-term returns and the best combination of risk and return measured by the Sharpe Ratio.
What’s more, dividends historically have proven much less volatile than stock prices, which can be a big relief when each Fed meeting throws prices all over the place when investors try to read between the lines of each rate hike or statement. Combine that lessened volatility with income, and suddenly the picture can be much rosier.
As a dividend growth ETF, DGRW tracks the WisdomTree U.S. Quality Dividend Growth Index in its efforts to identify firms that may become bigger dividend payers. The strategy mixes forward-looking earnings estimates with historical return on assets (ROA) and the return on equity (ROE) growth in its selection process. The stock selection process tends to skew towards larger firms, with stocks that are projected to pay more in dividends weighted more heavily. The index is rebalanced and reconstituted annually.
DGRW charges 28 basis points for its exposures and has outperformed its ETF Database category average and its FactSet segment average over the last three months, returning 7.2% in that time. It has also added $130 million over the last month in net inflows.
Dividends are a big part of many investors’ plans for 2023 right now, and it makes sense why. Investors have all kinds of options out there in dividends, but a dividend growth ETF has the added benefit of looking forward, rather than being heavily determined by past results. As such, investors may want to keep their eyes on DGRW in the weeks to come.
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