Using Model Portfolios to Harness Reliable Dividend Growth | ETF Trends

The first half of 2020 was unkind to dividend investors as the S&P 500 was home to a spate of payout cuts and suspensions. In any environment, those moves sting, but this year, negative dividend action hurts even more because interest rates are at record lows, depressing yields on government bonds and cash instruments.

Advisors can effectively combat a rough dividend climate with the Global Dividend Model Portfolio, which is part of WisdomTree’s Modern Alpha group of 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 the issuer.

This model portfolio is all the more relevant today when accounting for the importance of S&P 500 dividend growth over the past decade.

“With the substantial rise in the Index’s price accompanied by little change to the overall yield, investors shouldn’t be surprised to find that the Index’s dividend has grown by a similar amount—10.5% annualized,” said WisdomTree research analyst Matt Wagner in a recent note. “For all the talk of share buybacks as the preferred source of capital distributions in the U.S., the 10.5% annualized increase in S&P 500 dividends over the past 10 years is nearly double the historical rate of 5.8% going back to 1957.”

Valuing Dividend Growth

Dividend-growing companies are also high quality names. Moreover, high-yielding companies, of which many of this year’s dividend offenders previously were, are often under some kind of duress, signaling negative payout action could be imminent.

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. Many of the ETFs in the Global Dividend Model Portfolio are dividend-weighted, not yield weighted, potentially providing investors with a higher quality income stream.

“The WisdomTree U.S. LargeCap Dividend Index takes this emphasis on dividends a step further. The Index is reconstituted each December to reflect the performance of the 300 largest market-cap dividend payers in the U.S. Selected constituents are then weighted by their cash dividends,” notes Wagner. “Historically, this has resulted in an average yield spread of 111 basis points for the WisdomTree U.S. LargeCap Dividend Index relative to the S&P 500.”

Quality should not be conflated with low volatility, but there are times when quality stocks display low volatility traits. That was the case during the first-quarter slide, indicating that the quality factor can provide some protection during times of elevated market stress. Steady dividend payouts have also helped produce improved risked-adjusted returns over time.

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.