This year has brought a surprising and uncomfortable amount of dividend carnage among domestic equities, highlighting the risks associated with yield-based methodologies while reminding dividend investors that increase streaks, while seductive, aren’t always accurate gauges of what lies ahead.
The WisdomTree U.S. Quality Dividend Growth Fund (NasdaqGM: DGRW) is a prime example of a dividend ETF that relies on neither on yield nor on a company’s past track record of payout hikes.
DGRW seeks to track the price and yield performance of the WisdomTree U.S. Quality Dividend Growth Index. The index is a fundamentally weighted index that consists of dividend-paying U.S. common stocks with growth characteristics. The fund is a component in several of the model portfolios advisors can access in WisdomTree’s expansive series of Modern Alpha Model Portfolios.
“DGRW is ideal for investors who have a yen for growth stocks but are more interested in investing in ETFs that track growth and pay modest dividends. Or, for investors who want to invest in a basket of quality growth stocks across different sectors,” writes Michael Gayed of the Lead-Lag Report.
A Better Way to Dividends
With traditional dividend-paying stock strategies, investors may be exposed to unintended risks. For instance, high dividend-yielding companies may be exposed to some perceived risk with an equity investment in that company. For consistent dividend payers or dividend growers, investors are relying on historical patterns to repeat themselves in the future, and as we all know, past performance is no guarantee of future results.
DGRW is particularly relevant at a time when so many high-yield firms cut or suspended payouts in the first half of 2020. 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.
DGRW avoids many of those high dividend sector pitfalls with a sector mix right for these challenging times.
“DGRW’s sector allocations also look good with 25.62% allocated to IT, 18.13% to industrials, 15.91% to healthcare, 15.44% to consumer staples, and 8.11% to communications,” writes Gayed. “These days IT, healthcare, communication, and consumer staples sectors are in momentum, so we can say that, while most of DGRW’s holdings are solid dividend plays, about 65% of its portfolio’s market value is trending up.”
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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.
