WisdomTree

Abenomics, Dividend Growth, Japan

An Outperforming Japan Dividend Growth Strategy

by Jeremy Schwartz, Director of Research on August 22, 2016

Prior to Prime Minister Shinzo Abe coming to power in 2013 and the implementation of his aggressive fiscal and monetary policy, also known as “Abenomics,” Japan did not compare favorably to other major developed markets in terms of shareholder rewards, either dividends or buybacks.

Although Japanese companies have, on a historical basis, been among the most prodigious cash generators in the developed world, they have also been tight-fisted with that cash compared to their counterparts in the U.S. or the UK. A key element to Abenomics, the effort’s third arrow, is private sector structural reform. That effort is still in its nascent stages, but we see evidence that Japanese companies are responding to efforts aimed at shoring up allocation of capital.

In anticipation of increased monetary stimulus from the Bank of Japan (BOJ), Japanese stocks rallied last month after trailing broader developed market benchmarks for much of this year. However, Japanese dividend growers outperformed during the rough patch for Japan’s equity markets. As the chart below highlights, the WisdomTree Japan Quality Dividend Growth Index outperformed the MSCI Japan Index by more than 350 basis points (bps) for the year ended August 8.1
 
Year-to-date Outperformance
YTD Outperformance

Knowing that dividends are on the rise in Japan is only one part of the equation. Identifying the sectors with the best combinations of recently impressive payout growth and the most potential to consistently pay dividends over the long term is critical.

The WisdomTree Japan Quality Dividend Growth Fund (JDG) is designed to track the aforementioned WisdomTree Japan Quality Dividend Growth Index after fees and expenses. This strategy uses WisdomTree’s forward-looking dividend growers stock-selection methodology, which allows investors to access higher-quality Japanese dividend payers while potentially lowering portfolio volatility. Clearly, the aim of JDG is to offer investors a viable strategy for identifying the best opportunities of future dividend growth in Japan. However, JDG also has had a favorable advantage on current dividend yield as it sported a dividend yield that was 30 bps higher than the MSCI Japan Index as of August 8.2
 
Weighted Dividends

Click here for standardized performance of JDG.

Focusing on dividend growth, we see advantages in JDG’s methodology. In fact, the dividend growth rate of companies in JDG topped that of the MSCI Japan Index over the trailing one-, three- and five-year periods. The average dividend growth in JDG is nearly 14.3%, more than 40 percent above MSCI Japan’s dividend growth trajectory.

Since the implementation of Abenomics three years ago, weighting Japanese stocks by dividends has proved particularly advantageous as JDG delivered dividend growth of 17 percent, compared to around 12 percent by the MSCI Japan Index.

Sector allocations underscore some of JDG’s dividend advantage. Just look at Japanese Consumer Discretionary names, which are predominantly exporters. JDG’s weight to that group is currently more than 300 basis points than what is found in the MSCI Japan Index.

If we isolate the discretionary names in JDG, we not only find a higher dividend yield than the comparable group in the MSCI Japan Index, but superior dividend growth over the trailing one-, three- and five-year periods.
 
To Hedge or Not to Hedge?

When considering international investments, many investors think only about equity risk, often not realizing that in an unhedged investment they are also making a currency bet. That potentially diminishes returns during times of yen weakness. At WisdomTree, we believe the yen is poised to remain structurally weak over the long term.

The WisdomTree Japan Hedged Quality Dividend Growth Fund (JHDG), which is designed to track the WisdomTree Japan Hedged Quality Dividend Growth Index after fees and expenses, is one avenue to tap that theme.

A 50/50 strategy with both JDG and JHDG can be employed as another strategy that hedges a portion of the yen risk but keeps some in the event it strengthens.
 
Conclusion

WisdomTree has been providing investors with efficient, low-cost3 access to Japanese equities for more than a decade, and we’ve been expanding and refining that toolbox over the past several years. With Japan delivering some of the best dividend growth in the developed world over the past several years, investors looking to access that trend can consider the WisdomTree Japan Quality Dividend Growth strategies.
 
 
 
 
1Sources: Bloomberg, WisdomTree.
2Source: WisdomTree data, FactSet, as of 8/8/16.
3Ordinary brokerage commissions apply.

Important Risks Related to this Article

There are risks associated with investing, including possible loss of principal. Foreign investing involves special risks, such as risk of loss from currency fluctuation or political or economic uncertainty. Funds focusing their investments on certain sectors increase their vulnerability to any single economic, regulatory or sector-specific development. This may result in greater share price volatility. The Funds focus their investments in Japan, which can be impacted by the events and developments in Japan that can adversely affect performance. Dividends are not guaranteed and a company currently paying dividends may cease paying dividends at any time. JHDG uses various strategies to attempt to minimize the impact of changes in the Japanese yen against the U.S. dollar, which may not be successful. Investments in derivative investments can be volatile, may be less liquid than securities and may be more sensitive to the effect of varied economic conditions.

As these Funds can have a high concentration in some issuers, the Funds can be adversely impacted by changes affecting those issuers. The Funds invest in the securities included in, or representative of, their Indexes regardless of their investment merit, and the Funds do not attempt to outperform their Indexes or take defensive positions in declining markets. Due to the investment strategy of these Funds, they may make higher capital gain distributions than other ETFs. Please read each Fund’s prospectus for specific details regarding each Fund’s risk profile.

The Global Industry Classification Standard (“GICS”) was developed by and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and Standard & Poor’s (“S&P”), a division of The McGraw-Hill Companies, Inc., and is licensed for use by WisdomTree Investments, Inc. Neither MSCI, S&P nor any other party involved in making or compiling the GICS or any GICS classifications makes any express or implied warranties or representations with respect to such standard or classification (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability and fitness for a particular purpose with respect to any such standard or classification. Without limiting any of the foregoing, in no event shall MSCI, S&P, any of their affiliates or any third party involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits), even if notified of the possibility of such damages.

 

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