Amid a spate of dividend cuts among U.S. and European companies in the first half of 2020, advisors are reminded of the benefits of embracing dividend growth stocks rather than focusing on high yields.
Those looking for bespoke approaches to dividend growth may want to consider model portfolios, including WisdomTree’s Global Dividend Model Portfolio, which is part of the firm’s series of Modern Alpha 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.
This model portfolio features nine exchange traded funds, including ex-US funds addressing developed and emerging markets dividend payers.
The Models to Emulate for Dividend Growth
Investors should consider quality dividend growth stocks that typically exhibit stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders, and management team convection in their businesses.
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.
The high-quality focus may also help dividend growers outperform or do less poorly than the broader markets during weaker periods.
Dividends have added significantly to returns over time, contributing approximately 32% of the S&P 500’s total return since 1960. During the return-challenged 1970s, dividends made up nearly three-quarters of S&P 500 returns – while investors earned a cumulative total return of 77% from the S&P 500 in that decade, 60% of that 77% was from dividends.
“Companies have several ways to deploy their capital. A company can reinvest in its business via acquisitions, capital expenditures, share buybacks, or paying a dividend,” reports Financial Advisor. “Among those three items a cash payment, such as a dividend, is a significant commitment to shareholders as it is recurring over time and is a cash payment to every shareholder. Share buybacks may be announced but may not be fully implemented or implemented at all. Committing to dividend growth is an even larger pledge to shareholders. Why? Because in order to deliver growth of that dividend, companies have to institute cost controls and operational governance that leads to better consistency. The operational consistency flows through towards consistent dividend growth and is derived from a well-run company.”
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.
