One of the major market themes of 2016 has been a declining interest rate environment, which has helped yield-sensitive assets such as utilities and telecommunications stocks.
One of the most popular dividend
indexes, the Dow Jones U.S. Select Dividend Index
, has 30% of its weight allocated to the Utilities sector. Given the declining interest rates
, this has been a particularly strong equity strategy in 2016. As of August 16, 2016, the S&P 500 Index
was up just over 8%, while the Dow Jones Select Dividend Index was up 16.5%—almost the exact same return as the S&P 500 Utilities sector’s return of 16.4%.1
While we expect the global low-yield environment to persist for the foreseeable future, which should support yield-sensitive assets, on a longer-run basis the valuations in the Dow Jones Select Dividend Index may limit its relative performance potential.
One dividend strategy with valuations that look more attractive today: the quality and dividend growth part of the market. Typically, when we screen for factors such as profitability (return on equity (ROE)
and return on assets (ROA)
) and earnings growth, we might expect to pay a premium market multiple compared to a value strategy that just looks at current dividend income.
But in today’s market environment, the quality dividend growth
side of the market is selling at a lower P/E ratio
and a higher shareholder yield
• The quality metrics—such as ROE—are significantly higher for the quality
index than for the high-dividend index, and this makes potential dividend growth higher.
• Earnings growth estimates over the coming three to five years are 9.6% for the quality dividend growth part of the market, compared to 6.0% for the Dow Jones Select Dividend Index.
• The quality side of the market is also doing more extensive stock buybacks
. The combined dividend and net buyback yield is 5.6%, while the Dow Jones Select Dividend Index has a combined dividend and net buyback yield of 4.3%.
WisdomTree. U.S. Quality Dividend Growth Index vs. Dow Jones Select Dividend Index
WT Sector Over/Under-weight to Dow Jones
In addition to the unique fundamental characteristics of the WisdomTree U.S. Quality Dividend Growth Index (WTDGI), we find some noteworthy over- and under-weights in the portfolio. The biggest over-weight is in Information Technology. We find that this reflects WisdomTree’s forward-looking approach to dividend growth. Many indexes that rely on backward-looking dividend growth screens miss out on the performance of the Information Technology sector, where we often find relatively younger companies. Contrast this with WTDGI’s under-weights to Utilities and Financials, typically sectors with higher leverage.
While there are many strategies attempting to capture dividend growth in the market today, they often utilize backward-looking screening criteria. At WisdomTree, we believe that WTDGI’s forward-looking methodology offers a differentiated approach. We believe WTDGI offers investors a unique way to access quality companies by screening for fundamental characteristics such as return on equity and return on assets. Pair this with a screen for long-term growth expectations, and we think WTDGI becomes a powerful tool for investors looking for quality companies as well as dividend growth.
Sources: WisdomTree, Bloomberg as of 8/18/16.
Sources: WisdomTree, Bloomberg as of 7/30/2016.