A Dividend ETF That Leans Toward Profitable Payers

Investors who are looking for a value-oriented income opportunity may look to a fundamentally weighted dividend-focused exchange traded fund strategy that diversifies risk and rebalances towards those that have become cheaper relative to their dividends.

The WisdomTree LargeCap Dividend Fund (NYSEArca: DLN) 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. Or to put it in layman’s terms, DLN eschews weighting by dividend increase or yield, the latter of which can lead investors toward stocks vulnerable to dividend cuts.

“This approach balances firm size (larger companies tend to pay more absolute dividends) against yield,” Adam McCullough, an analyst on Morningstar’s manager research team, said in a research note. “To rebalance back to its target dividend weightings, the fund increases stock holdings that have become cheaper relative to their dividends and their peers, and trims positions that have become more expensive. This contrarian rebalancing discipline injects a modest value tilt.”

Consequently, due to its dividend-weighting methodology, the ETF leans toward larger and more profitable companies, like Apple (NasdaqGS: AAPL), Microsoft (NasdaqGS: MSFT) and Exxon Mobil (NYSE: XOM).