When considering the benefits of rotating toward value, investors can turn to dividend yield exchange traded fund strategies in today’s unique market environment.
In the recent webcast, WisdomTree’s Original Idea and Value Investing for the 2020s: A Discussion featuring Professor Siegel, Professor Jeremy Siegel, senior investment strategy advisor, WisdomTree Asset Management, highlighted the recent surge in money growth that has contributed to high inflationary pressures, especially the 17.5% increase in M2 money supply from March to July in 2020. M2 money growth was also at an all-time record high in 2020.
The increased money supply has contributed to rising inflation rates. Siegel noted that there has been increased inflation across the board, especially among components that weigh most heavily on American consumers, like housing costs.
Siegel also outlined the shifts in the value and growth styles. Value generally outperformed growth until the onset of the global financial crisis, and growth has dominated since the beginning of the recovery. This trend has been exacerbated by the novel coronavirus pandemic, as growth and its flagship technology companies have generally fared better during the economic fallout. This is in contrast to the cyclical and value-oriented businesses that are more levered to economic activity. As a result, forward P/E ratios for growth companies have been bid up to remarkably high valuations due to the minimal damage they have sustained from the economic impact of the pandemic.
Consequently, after the long run in the growth style and elevated valuations in this category, Jonathan Steinberg, chief executive officer, WisdomTree Asset Management, argued that we may be witnessing a potential return to value. If investors are interested in the value tilt, Steinberg highlighted dividend ETF strategies, like the WisdomTree U.S. LargeCap Dividend Fund (DLN), to help diversify an investment portfolio.
Jeremy Schwartz, global chief investment officer, WisdomTree Asset Management, argued that dividends have provided the majority of the stock market’s real return over time, can provide downside protection during market bubbles, and are an unambiguous objective measure that cannot be restated and can be applied globally.
Dividends have been an outperforming factor so far in 2022. For instance, the high dividend category has returned +4.41% so far this year, and the large-cap dividend category has returned -4.24%. In comparison, minimum volatility was down 8.82%, quality was 14.8% lower, and momentum declined 19.0%, while the S&P 500 has decreased 12.9%.
Dividend-paying stocks may also do well in a rising interest rate environment. High dividend-paying companies have exhibited a significant positive correlation to changes in the 10-year Treasury yield, which usually rises on a rising rate outlook.
Schwartz noted that something like DLN could help investors capture the dividend factor. DLN seeks to track the investment results of dividend-paying large-cap companies in the U.S. equity market. The WisdomTree U.S. LargeCap Dividend Index is a fundamentally weighted index that measures the performance of the large-capitalization segment of the U.S. dividend-paying market. The index is comprised of the 300 largest companies ranked by market capitalization from the WisdomTree U.S. Dividend Index. The index is dividend-weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share.
Financial advisors who are interested in learning more about value investment ideas can watch the webcast here on demand.