Will You Capture Apple's Growth in Your Dividend ETF Before 2023?

Apple rocked the investment world with a blowout quarter, announcing on January 27 record profits of $18 billion for its latest quarterly report¹. These strong results were not just a record for Apple; it was the greatest single quarter ever reported for any public company.² IPhone sales were very strong, including explosive growth in sales from China, up 70% over the year.³ Apple’s strong results mean it now has $178 billion in cash and marketable securities.⁴ Apple has been using its cash to increase its capital return to shareholders in the form of both dividend and buybacks. Apple’s dividend payment is a relatively new phenomenon—it paid its first quarterly dividend since the mid 1990s in August 2012⁵ . On a split-adjusted basis, Apple was paying $1.51 annualized per share in that first payment.⁶ Two and a half years later, Apple has raised its annual dividend a cumulative 25% to $1.88, paying 47 cents per quarter for each of the last four quarters.⁷ With these very strong results in the latest quarter, it’s reasonable to expect good news in Apple’s next dividend announcement. For context, Apple raised its quarterly dividend 7.9% in the second quarter of 2014.⁸ And while the past never guarantees the future, I would be looking for a further acceleration in the dividend hike.   The question for investors: Is your dividend exchange-traded fund (ETF) capturing Apple’s strong growth? It depends if your dividend ETF tracks an index that weights BY dividends or one that weights FOR dividends. For example, the NASDAQ U.S. Dividend Achievers Select Index is a popular dividend growth index that requires 10 consecutive years of continual dividend growth to qualify for inclusion. However, the WisdomTree U.S. Dividend Growth Index (WTDGI) does not have such a requirement. Why does this matter? Because we believe that dividend indexes with backward-looking growth screens may end up excluding some of the faster growing new dividend payers that may not have 10-year histories of dividend payments, much less dividend growth. The first time Apple could qualify for inclusion in the NASDAQ index is in 2023—and that’s if (and only if) it continues to raise its dividend every year between now and then. Apple today is the second largest dividend payer in America behind Exxon Mobile.⁹ And in my opinion, it’s likely that Apple will be the largest dividend payer in the world by the end of the year, given the oil price headwinds Exxon is facing and the blowout numbers we just saw from Apple.   A Focus on Quality, Return on Equity (ROE) Lead to Higher Dividend Growth Key drivers of the stock selection in the WisdomTree U.S. Dividend Growth Index are return on equity, return on assests and earnings growth. Return on equity, according to finance theory and the dividend discount model, is intimately related to dividend growth. The higher the return on equity, the theory goes, the higher the sustainable dividend growth of that company.   Theory Meets Reality: When we look at the constituents of the WisdomTree U.S. Dividend Growth ETF (DGRW), which tracks the performance of WTDGI—and, by design, has a stock-selection model driven by ROE—and compare it to a universe of investable dividend-paying stocks represented by the broad market WisdomTree Dividend Index, which contained more than 1,450 companies as of December 31, 2014, we see that the stocks within DGRW historically have been growing dividends faster over the last one, three and five years. For current holdings of the WisdomTree Dividend Index, click here. Apple’s strong gains and future dividend growth potential raise the question, “Is my dividend ETF designed to capture today’s (and tomorrow’s) dividend payers, or are these new technology companies going to be missing for a very long time?” We see below that Apple was the second largest exposure in DGRW as of December 31, 2014.   Do you really want to wait until 2023 to hold Apple in your dividend ETF? For current holdings of the WisdomTree U.S. Dividend Growth Fund (DGRW), click here.         ¹Source: “Apple Reports Record First Quarter Results,” Apple Press Info, 1/27/15. ²Source: “Apple Posts the Biggest Quarterly Profit in History,” BBC News Business, 1/28/15. ³Source: “Apple Posts the Biggest Quarterly Profit in History,” BBC News Business, 1/28/15. ⁴Source: “Apple Reports Record First Quarter Results,” Apple Press Info, 1/27/18. ⁵Source: Bloomberg. On February 13, 1996, Apple canceled its quarterly dividend. ⁶Source: Bloomberg. ⁷Source: Bloomberg, with last four ex-dividend dates being 5/8/14, 8/7/14, 11/6/14 and 2/5/15. ⁸Source: Bloomberg, with ex-dates from 2/6/14 to 5/8/14 being measured. ⁹Source: Bloomberg, measured as of WisdomTree’s 11/30/14 Index screening.