“The market looks expensive” is a common refrain we hear today. Sure, after a seven-year bull market, the U.S. market as a whole looks more expensive. Yet some prognosticators say we can get as low as zero real returns from the U.S. markets over the coming years. This is too pessimistic in my view, and I will point to the part of the market that looks most attractive to me from a return expectation standpoint.

In today’s world, growth is scarce, and there is a preference for companies that can achieve above-subnormal growth. Should investors for the foreseeable future forget their bias to allocate more to small-cap value in favor of growth in a low-growth world? 

At WisdomTree, we believe that screening and weighting equity markets based on fundamentals such as dividends or earnings can potentially help produce higher total and risk-adjusted returns over a complete market cycle. One of the most important elements of a fundamental index is the annual rebalance process, where the index screens the eligible universe and then weights those securities based on their fundamentals.

U.S. companies historically have paid out a large majority of their earnings as dividends. From 1871 to 2015, the average dividend yield was approximately 4.4%, and the average dividend payout ratio was more than 60%..