As a foundation for index construction and securities selection, shareholder yield is getting more attention. That implies some degree of novelty. But in reality, it’s rooted in tried-and-true concepts. The pillars of shareholder yield are buybacks, dividends, and debt reduction.
On a stand-alone basis, each can serve investors. When combined, the trio can become a potent force. The WisdomTree U.S. Value Fund (WTV) is an example of an exchange traded fund that delivers the benefits of shareholder yield in convenient fashion. In fact, WTV debuted in February 2007, and was previously known as the WisdomTree U.S. Quality Shareholder Yield Fund.
While the ETF’s name changed, its emphasis on shareholder yield, rooted in dividends and share repurchases, has not. Dividend-paying stocks could regain favor among investors when the Federal Reserve lowers interest rates. Additionally, WTV could be all the more relevant at a time when many investors are worried about high levels of concentration in traditional equity indexes. The WisdomTree ETF is home to 160 stocks, none of which exceed a weight of 1.86%.
Understanding Ins & Outs of Shareholder Yield
There are some complexities associated with shareholder yield. They arguably highlight the benefits of accessing the strategy via ETFs such as WTV.
“Shareholder yield ignores how companies deliver cash to shareholders and instead considers the combined return of value from dividends and buybacks,” noted Morningstar analyst Zachary Evens. “Research suggests shareholder yield can be a driver of long-term returns. But applying it as a practical investment strategy can be tricky.”
A Potential Less Risky Option
Evens also mentioned concentration risk, which is apparent with some shareholder yields. That indicates WTV could be a less risky option than some of its rivals.
“Market dynamics can cause certain sectors, industries, or countries to yield more than others from time to time. This causes shareholder yield ETFs to concentrate in high-yielding areas, regardless of associated risks,” he said.
WTV is one of eight dedicated shareholder yield ETFs on the market today. And, not surprisingly, those funds employ different methodologies. In the case of the WisdomTree fund, a quality overlay is used. That can serve the aim of reducing volatility and avoiding value traps.
On a related note, quality is often associated with companies that are generous when it comes to shareholder rewards. More importantly, the quality factor often signals that firms have the financial resources to indulge and grow buybacks and dividends without straining their balance sheets. Said another way, some WTV holdings have already proven to be reliable dividend growers and have done so without burdening their balance sheets.
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