Quality And Value Meet In This Dividend ETF
The quality and value factors are two of the most followed and studied investment factors, but they can be mutually exclusive. Of course, it is possible for a value stock to not be a quality stock. Likewise, stocks with frothy valuations do not always lack quality simply because they are pricey.
With that in mind, it can be difficult to efficiently marry the two factors under the roof of a single exchange-traded fund, though plenty of ETF issuers have tried and continue to trying. One ETF that has successfully married quality and value is the WisdomTree High Dividend Fund (NYSE: DHS).
Highlight On DHS
The WisdomTree High Dividend Fund, which is home to nearly $940 million in assets under management and is nearly nine and a half years old, is, as its name implies, a high dividend ETF. Predictably, that means a combined weight of nearly 21 percent to high-yielding telecommunications and utilities stocks. DHS follows the WisdomTree High Dividend Index (WTHYE).
That index “searches for relatively higher-yielding U.S. dividend payers, thereby establishing a value type of exposure. With the extended period of low interest rates that we’ve seen, these types of stocks have tended to become more expensive, as they are seen as sources of potential income generation,” according to a recent note from WisdomTree, the fifth-largest U.S. ETF issuer.
Companies In DHS
Though DHS does not depend on dividend increase streaks as part of its weighting methodology, the ETF is chock full of companies with lengthy track records of boosting payouts.
For example, Dow components Exxon Mobil Corporation (NYSE: XOM), Procter & Gamble Co (NYSE: PG) and The Coca-Cola Co (NYSE: KO) are all dividend aristocrats. Those stocks combine for over 10 percent of DHS's weight.
DHS not depending on dividend increase streaks as a gauge of a company's future ability to pay and raise dividends opens the door for the ETF to include some recent dividend growers. For example, the ETF's top 10 holdings include some companies that lowered dividends during the financial crisis, including General Electric Company (NYSE: GE) and JPMorgan Chase & Co. (NYSE: JPM), but have recently been resuming dividend growth.
On a related note, financial services accounts for 17 percent of DHS's weight, the ETF's largest sector allocation. That sector was a dividend offender during the crisis, but has recently been one of the leading sources of S&P 500 dividend growth.
“Clearly, the focus in value strategies is on how price relates to fundamentals such as dividends, earnings or book value. Quality factors focus on the inherent stability of the fundamentals themselves, making the two approaches interesting complements,” noted WisdomTree.
Importantly, the quality/value combination bears fruit. Over the past five years, 12 months and year-to-date, the index DHS tracks has outperformed the Russell 1000 Value Index, according to WisdomTree data.
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