Back To The Future With A Dividend ETF
Plenty of experts have noted that dividend exchange traded funds have had a rough 2015. Ongoing speculation that the Federal Reserve is nearing an interest hike, the strong dollar's burdensome impact on the consumer staples sector and a spate of dividend cuts in the energy sector are among the catalysts cited as hindering dividend ETFs.
In fact, none of the four largest U.S. payout ETFs, a group that includes venerable names such as the Vanguard Dividend Appreciation ETF (NYSE: VIG) and the Vanguard High Dividend Yield ETF (NYSE: VYM), have traded higher this year.
To be fair, 2015 is not even eight months old and eight months is a short timeframe when it comes to dividend investing. With dollar's rise undaunted and plenty of investors still positioning for higher interest rates, now is an ideal time for dividend investors to consider alternative dividend ETFs, including the WisdomTree U.S. Dividend Growth Fund (NASDAQ: DGRW).
A Closer Look At DGRW
As has been previously noted, DGRW has significant advantage over some rival dividend ETFs, though it seems counterintuitive on the surface. The ETF does not focus on dividend increase streaks as part of its weighting criteria.
Among other positive traits, that allows DGRW to sport a 19.5 percent weight to technology stocks, its second-largest sector weight and one of the largest weights to that sector among all dividend ETFs. Looking for a dividend ETF that features four tech stocks among its top 10 holdings, including Apple Inc. (NASDAQ: AAPL)? Good luck finding that trait among legacy dividend ETFs, but luck is not needed because DGRW does feature four tech stocks in its top 10 lineup. Still, a massive amount of money is allocated to dividend ETFs that emphasize payout increase streaks.
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“And collectively more than $45 billion is invested in exchange-traded funds designed to track these backward-looking dividend indexes. This seems like a smart idea, but it keeps many investors from capitalizing on shifting trends in the dividend landscape and positioning for the future, specifically when it comes to newer payers and firms recovering from recent dividend contractions,” according to a recent WisdomTree research note.
Simply because DGRW does not emphasize increase streaks does not mean dividend growth is not significant in the fund's weighting. Actually, DGRW's nearly 300 holdings are selected based on return on equity, return on assets and future earnings expectations. After all, it is the cash a company generates going forward that will support future dividends and payout growth.
“We believe that backward-looking indexes can keep the companies growing their dividends the fastest out of a portfolio. In fact, dividend indexes that employ backward-looking growth screens may not be able to take advantage of the technology firms and other companies driving today’s dividend growth trends for years to come,” said WisdomTree.
One More Thing
That leads into another important point. Dividend growth is obviously important, but so is pace of dividend growth. Look at Microsoft Corporation (NASDAQ: MSFT), DGRW's third-largest holding. The company has more than doubled its payout in just five years. It took Procter & Gamble Co. (NYSE: PG), one of the most beloved dividend stocks, nine years to double its dividend.
When it comes to sectors vulnerable to dividend lethargy, DGRW's allocation to energy, home to the most negative dividend actions in the S&P 500 this year, is just 7.15 percent. Utilities, some of which have highly leveraged balance sheets, a trait that could pinch payouts if interest rates rise, are nowhere to be found in DGRW.
Disclosure: The author owns shares of DGRW.
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