ETFs Delivering Dividend Growth The Right Way
Over the long term, dividend growth and reinvestment of those growing dividends are potent boosters of a portfolio's total returns. Dividend growth can often be found via the quality factor, and there is no shortage of exchange-traded funds offering investors exposure to both themes.
Among the most seasoned and best-performing ETFs with featuring steady dividend growth and quality tilts are the WisdomTree LargeCap Dividend Fund (ETF) (NYSE: DLN) and the WisdomTree High Dividend Fund (NYSE: DHS), both of which turned 10 years old earlier this year.
DHS, DLN In Focus
DHS's underlying index, the WisdomTree High Dividend Index (WTHYE) “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,” according to WisdomTree.
DHS is a defensive ETF that marries two favored income themes: low volatility and dividend yield. The ETF's underlying index yields just over 4 percent with annualized volatility of under 18 percent, according to issuer data.
An important point to note is that as the current bull market has extended its now lengthy run, favored factors such as low volatility and high dividends have gotten progressively more expensive. However, WisdomTree ETFs, such as DHS, have avenues for tempering investors' exposure to richly valued stocks and sectors.
Bull Market Influence
“While the WisdomTree Indexes certainly saw P/E multiple expansion, albeit to varying degrees, it’s important to note that each has an annual rebalance that builds in a sensitivity relative valuation. Over time, the avenue to gaining greater weight in these indexes is through the growth of dividends — an important distinction to be made against indexes that may be weighted by market capitalization,” said WisdomTree in a recent note.
Since inception, DHS has topped 77 percent of rival funds. Over the past five years, that number jumps to 99 percent.
While investors have poured billions off fresh capital into bond ETFs and defensive sectors drove the S&P 500 earlier this year, those themes, particularly the latter, are showing vulnerability as bond traders price in rising odds of the Federal Reserve raising interest rates in December.
“If the U.S. Federal Reserve embarks on a cycle of raising interest rates— even a slow cycle — then dividend-paying stocks such as those in the Utilities or Telecommunication Services sectors may face competition as sources of income,” noted WisdomTree.
On that note, it is worth highlighting that DLN allocates just 11.3 percent of its weight to rate-sensitive telecom and utilities stocks. Conversely, the ETF devotes nearly 27 percent of its combined weight to cyclical technology and energy stocks, sectors that historically perform well when rates rise.
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