One of the themes emerging early in 2022 is that it is shaping up to be another banner year of dividend growth, and that could benefit an array of exchange traded funds, including the WisdomTree U.S. LargeCap Dividend Fund (NYSEArca: DLN).
The $3.38 billion DLN turns 16 years old in June, making it one of the more seasoned dividend ETFs on the market and indicating that the fund is battle-tested across a variety of market settings. DLN’s benchmark, the WisdomTree U.S. LargeCap Dividend Index, weights large-cap domestic stocks on the basis of cash dividends paid. That could be a compelling methodology for equity income investors at a time of strong dividend growth expectations.
DLN’s fundamentally weighted approach could be beneficial to investors because it emphasizes dividend growth, which is expected to surge again this year. Bank of America’s Savita Subramanian estimates that domestic payouts could jump 13% in 2022. Adding to the DLN case this year is dividend growth’s reputation as a valid inflation-fighting strategy.
“Our equity strategists find that dividends per share (DPS) and earnings per share (EPS) have moved together historically with +7.7%/yr average EPS growth vs. +6.9%/yr average DPS growth since 1946,” according to Bank of America Global Research. “Dividends have grown by 5.6% on an annualized basis since 1950 while inflation has grown at 3.5%. Even as inflation grew at almost twice its historical average between January 1973 and December 1987 (6.9%), dividends grew faster at 7.1%.”
DLN holds nearly 300 stocks, which is a fairly deep bench among dividend ETFs. However, investors shouldn’t take that number for granted because the dividend landscape isn’t as densely populated as many investors believe. Additionally, DLN could shine as the Federal Reserve sets out on raising interest rates.
“Scarcity is another argument in favor of dividends, as 50% of stocks in the US BofA Research coverage universe offer no dividend, up from 33% in 2014. Higher rates should also support dividend growth as our economists expect the Fed to hike in March with 25bps of hikes in each of the next eight quarters,” adds Bank of America.
DLN allocates over 48% of its weight to the technology, healthcare, and financial services sectors. That’s important because those are among the groups with the cash and balance sheets to not only increase dividends this year, but to do so for years to come.
“Historically low levels of leverage, attractive EPS stability, and depressed dividend payout ratios are the primary fundamental drivers of an optimistic dividend outlook. Savita prefers positioning for dividend payouts over buybacks given elevated valuations,” concludes Bank of America.
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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.