WisdomTree’s Original Idea and Value Investing for the 2020s: A Discussion featuring Professor Siegel
Not all dividend-paying stocks are alike. Value-screened dividend payers that consistently raise their yields saw strong returns in 2021 and 2022. Will the good times continue? During this webcast, WisdomTree Asset Management and ETF Trends discuss WisdomTree’s “original idea” of dividend weighting with Jonathan Steinberg, WisdomTree CEO, and Professor Jeremy Siegel, Senior Investment Strategy Advisor to WisdomTree. Joined by Jeremy Schwartz, Global CIO, they also cover the benefits of rotating toward value, as well as how investors can find income in today's unique market environment.
This webinar was simulcast via On24.
Welcome to WisdomTree's Original Idea and Value Investing for the 2020s: A discussion featuring Professor Siegel. It's a webcast sponsored by WisdomTree, asset management. I am Lara Crigger and I am the editor in chief of ETF trends and ETF database. I will be your moderator for today, and I am so excited about the discussion that we have in store for you today. We're going to cover a lot of ground with Professor Siegel, including we're going to get a look at his latest outlook on growth versus value. We're going to dig deep into how value screens can help investors during periods of volatility. And we're going to revisit WisdomTree's original idea of dividend weighting.
Now it's time for me to introduce today's panelists. I'm very excited for the crew I've got with me, delighted to be joined by Jono Steinberg chief executive officer for WisdomTree asset management. Jono founded WisdomTree and he's served as chief executive officer since 1998. He's also served as president from 2012 to 2019. He's been a member of the board of directors since October 1988 and served as chair of the board until 2004. Jono was also responsible for the creation and development of WisdomTree's proprietary index methodologies.
I'm also joined by Professor Jeremy Siegel, he's the senior investment strategy advisor to WisdomTree Asset Management. He is also the Russell E. Palmer professor of finance at the Wharton School of the University of Pennsylvania. In 1994, he received the highest teaching rating in a ranking of business school professors conducted by Business Week Magazine. Professor Siegel has written and lectured extensively about the economy, financial markets, and he regularly contributes to financial news media. His book Stocks for the Long Run was named by the Washington Post as one of the 10 best investment books of all time. His latest book, The Future for Investors, is a best seller.
Last but definitely not least, we have Jeremy Schwartz who is the global chief investment officer for WisdomTree. Jeremy leads WisdomTree's investment strategy team in the construction of the firm's equity indexes, quantitative active strategies and multi- asset model portfolios. Prior to joining WisdomTree, he was head research assistant for Professor Siegel. He also helped with the research and the writing of Stocks for the Long Run and The Future for Investors. Jeremy is also the co-author of the Financial Analyst Journal paper What Happened to the Original Stocks and the S&P 500?
Now, before we turn to the topic of today, I want to take a brief second to do a quick pulse check with our first polling question. Let's get that one up on the screen there. Here it is. So the first question is, do you plan on increasing or adding dividend ETFs to your clients' portfolios? Yes, no, or not sure. Give you a second or two to look those over and make your choice.
All right. Let's see what the survey says here. Drum roll. Wow! 74, 75% of our audience is landing on increasing or adding dividend ETFs into their mix. So, let's talk a little bit about this. Jeremy, Professor Jono, we've seen this huge increase in engagement and flows into dividend, ETFs, are our viewers on the mark here? Should they continue putting money into dividend strategies? I feel like that's a little bit of a leading question for you all, but we'll go for it. Professor, please.
Professor Jeremy Siegel:
Well, Lara, you've got it. Lara, you've got it absolutely right. And I think our viewers got it absolutely right. Look at the change in the market. People are looking for cash flows that's what dividends are. I’m really excited about seeing so many make this choice.
That's wonderful. Well, why don't I just hand you the mic now. You're going to give our viewers a 30,000 foot overview of the challenges that are facing the markets and various asset classes and what your outlook is for the rest of the year. So Professor, why don't you take it away?
Professor Jeremy Siegel:
Well, thank you very much. If we could go to the slides. Right. As you mentioned, the two books that... Let me also mention Stocks for Long Run is going to be out with its sixth edition in September. It is by far the most significant that I have made since the first edition came out in 1994. Jeremy Schwartz is going to be a coauthor with me on that. He has put in work for me for more than 20 years, and certainly more than deserves to be with me on this title. I'm really excited about this book. It answers every one of, I think, people's questions about what has been going on over the last 10 years in the market. So, thank you on this slide.
All right, if we could move on. This is that long term slide that starts all my presentations. I started, as I said, 1994, and that used data by the way, through 1992, the first edition. So we've come, what, 30 years. And you see that red line that indicates stocks. And yeah, we were a little bit over trend and we've come back down the trend. That trend is the most solid trend of any asset class in the world. 6.9% real return. Now, I think forward we're looking we're going to be a little bit lower, probably in the neighborhood of five, five-and-a-half percent type of real returns going forward and bills are going to be much lower. Gold stays above inflation, which is good. The dollar is going to keep on going down. Inflation's going to keep on getting worse, but it's not going to get better much soon. We will talk about today's, what I consider very bad report on the CPR.
There's one more thing I want to say about this one for going on. And that is the inflation that the United States has experienced over the last 220 years has occurred almost exclusively since the end of the Second World War. As you can see, that's when the dollar is going down. Notice that has had no negative impact on the real return on stocks, the top line. Stocks are real assets. They're claims on real capital. They're claims on plant, equipment, land, intellectual property, copyrights, patents. These are real assets. These assets will maintain their value in an inflationary environment. Yes, when the Fed starts tightening, it's rocky. And I've been saying that for six months. I've been calling the inflation for two years, that we will talk about. But when all is said and done, you emerge with a real asset when you invest in stocks, you do not when you invest in bonds.
Next slide, please. This is the M2 money supply, which is the most important concept of money. From 2016 through 2021 in the top panel, in the bottom panel 1970 all the way to 21. Now, this is what I want to show you. You can see what happened from March to July 2020. We had the biggest explosion of the money supply in history. I'll show you this more a little bit later, but you can see that we increased 17.5% in a four- month period, March through July. It had been going at 5.5% half percent per year for 34 years before that. You take a look at the bottom slide and you see that in the high inflationary period, which was 1970 through 86, we increased money at 9.6% a year, and we had 7% inflation.
Then we increase money at 5.4% a year and we had 2% inflation. Don't tell me money doesn't matter. It does. It matters a lot. And you can see since that increase in the money supply, we have gone up at 16.5% per year. Now let me also say the good news is the last two months we've had a big moderation in the money supply growth. And that gives me hope. Doesn't give me hope for today or tomorrow or the rest of this year, or really early next year, but towards the end of 2023, 2024, we might be getting our inflation rate down. Don't expect any fast fix on this.
Controlling inflation is not like driving a car. You take the wheel and you pull it to the right and your steering wheel and the car goes to the right immediately. No. One thing I learned, and learned because I was fortunate enough to be the student of Professor Milton Friedman... Well, Howie. Professor Milton...actually, my first teaching position was his last four years at the University of Chicago. He said, "18 to 24 months after an explosion of the money supply, you're going to get inflation." Well, take a look at that top part of that graph. March through July, 2020. Now, tell me what's going on now? March through July 2022. Wow. Could it be more apparent? I started writing articles about the inflation rate that we were going to have back in April and May. In fact, they're posted because on the Global Independence International Conference website, the letter that I sent to all my colleagues saying, this is just going to produce inflation down the road, not today or tomorrow, wait till a year and year and a half ago, from now, and that's exactly what we got.
Go to the next slide, please. This is actually taken from the data that Milton Friedman painstakingly collected over a 10 year period that resulted in its greatest work, The Monetary History of the United States, published in 1965 and for which he won the Nobel Prize in economics in 1975. The relation between money and inflation: the solid line is money, the dotted line is inflation. I have lagged inflation two years because as his research and others' have shown, inflation lags two years from a money burst. Take a look at the end of that chart, the money burst of 2020. In 2020, we had a 25.8% increase in the money supply. We have never had that high a monetary increase in the 150 year history of this series. The peak in World War II, 18%, the peak in World War I was less than 16%.
One was less than 16%. How did we think we were not going to have inflation with this? A terrible misreading by Chairman Powell and the Federal Reserve. I fault the Federal Reserve for not paying attention to money. We can talk about this in the Q&A if you want, but it was very apparent to me all the inflation that we're going to have, and we're not done with it by any means. By any means. If you could go to the next slide, thank you.
Now I had to prepared this a couple days ago. Today we got a new inflation rate. This is something I've been talking about for eight months. Take a look at housing inflation. By the way, everyone is talking about, "Oh, did you see housing inflation? See housing inflation? See housing inflation?"
I've been talking about the fact that in the official monetary statistics, that housing inflation is collected with a tremendous lag. We know that new leases for housing are almost 20% above old leases. However, when we look at rentals ... Now, again, this isn't...this month, I think it went up to 5.5% or so, but it was 4.2%. I said, well, that's going to catch up in the next year, and that's a huge part of the consumer part of the index.
Take a look at what we call owner's equivalent rent, which is a calculation of how much it costs to rent your own house to yourself, which is based on interest rates and purchase prices. 4.3%. I mean those are laughable numbers, but they're all going to be 15% and 20% by next year. This is going to keep on pushing up the rate of inflation. No...for official inflation. For official inflation. We actually had inflation of 10% to 12%. That's what we really have. It's just 8.5% in the official numbers because of the way they do it.
So in a way, let's just hope the Fed doesn't overreact, "Oh my god, we're not doing inflation." Let's keep your eye on the money supply. Raise interest rates as fast as possible, way behind the curve. I mean it is just absolutely astounding to me that Chairman Powell with an inflation of 8.5%, more than four times its target, with a job market that he himself submits it's one of the tightest, if not the tightest, in history is still below what he calls the neutral rate.
I mean I've been saying this for two years. How can that be? When inflation is above and when you're in a tight labor market situation, you should be above the neutral rate, which, by the way, the Fed says is 2.4%. So even with 250 basis points, they're still going to be below that. The balance sheet reduction is ridiculous and slow. Everything is so slow and so behind. It's a travesty, honestly. He's a well-meaning man...no conspiracy, but a tremendous, probably the third greatest mistake in Fed history, the first one being the Great Depression of the '30s, which, as many have said, including Milton Friedman, they could have prevented. They just didn't give any money to the banks as they all collapsed around them, which is exactly why the Federal Reserve was formed in 1913 to prevent that from happening.
The second biggest mistake was the double-digit inflation of the '70s and Arthur Burns. That could only be stopped, finally, when Volcker had the guts to raise the interest rate to 20%. This is the third greatest mistake. Let's hope it doesn't become the second greatest mistake in the 110-year history of our Federal Reserve. Next slide, please.
Value and growth. But every 25 years we have ... I'm going to use the word bubble, but I'm just going to say that the growth surges relative to value. Now many of you younger professionals out there probably don't remember the 1975 Nifty 50 where institutions bought growth stocks at any price, saying we're going to put them in our pension funds and in the long run they're always going to do well.
Yeah, well, some did, many did not. Most did not, although a few that did became winners. But the highest price one which they bought was Polaroid, which they happily paid 90 times earnings for. Then they bought Eastman Kodak, and then they bought Sears, and then they bought Kresge at P/E ratios of 30, 40, 50, 60, and 70. It did not end well.
The second big bubble, I think you all remember the dot-com mania. Now we're not there. Just a couple hours ago, I mentioned ... We all know the NASDAQ went down 80% from 2000 to 2002, and that was way overblown. We're not going down there. I mean it's possible. That's right. That's it. Thank you. Second bubble. I mean the NASDAQ may go down 40 at the end. I don't know. It may go down 30. I'm not calling that. I'm not even sure we're going to go down into a bear market on the S&P, which, by the way, is down around 17%, not yet in bear market territory.
Now we're in the third. Now the interesting thing about this third, third, is actually a lot of growth deserved most of it. Not all of it, but most of it. It wasn't like 2000 where the growth really didn't deserve hardly any of it. I mean Apple's a great company. Google's a great company. Amazon's a great company. The idea that you paid billions for sales to ratios is crazy, and all those stocks are down 60%, 70%, 80%, 90%. It's healthy for the market that those have been shaken out. We're getting back to principles.
But still valuations are extremely stretched. Value selling for ... And I know Jeremy's going to talk maybe more about this. What is it now? 14 times earnings projected. Emerging markets are 11 times earnings, 10. Don't forget, interest rates, real interest rates, are still zero. Is that my last slide, Lara? I'm not sure.
It sure is. We're going to hand it over to Jono.
Professor Jeremy Siegel:
Okay. So I had good…yeah, I'm going to join Jono.
Professor Jeremy Siegel:
Take it from here, Jono.
Thank you so much, professor.
Yeah, thank you.
It's such an honor to have been working with Professor Siegel and with Jeremy Schwartz for the last 18 years. It's amazing how quickly time flies. So the original idea, I was looking to create a new asset management company. It's sort of between the year 2000 and 2002. I had recently discovered a few years earlier the ETF wrapper. And so ,the question I was asking myself was how to thrive in a Vanguard world.
I knew that I didn't want to compete with Vanguard on non-exclusive indexes like the S&P 500, which led me to an idea that I have to create my own IP, make it proprietary, that to compete with Vanguard, you needed to make it somehow better. And so, we created a business model. You can go to the next slide. A business model of self-indexing.
And so, the original idea, it started with an idea of what if I created the Wilshire of dividends, and I took just all dividend-paying securities cap, weighted them, went back to the birth of the S&P 500, and tested the performance?
I was thinking about it, and my next question was how can I enhance the yield? I didn't want to yield weight it, because that wouldn't be scalable. And so, I had an idea that what if I weighted it by dividends paid? This really is the original idea. Dividends paid meaning the actual amount of cash dividends being paid by each corporation. So the biggest companies pay the most. What I was thinking is this would be scalable. If I yield weighted it, it wouldn't scale.
Something that was very important to me ... As somebody who creates your own indexes historically, you need to be very careful that you're not misleading yourself, that you're not data mining. And so, the one beautiful thing about dividends paid, it's such a clean metric. It never gets restated. It's the same metric around the world. And so, we really created something around investing in the global dividend stream and letting that allocate your equities. How much would go to different regions? It's just something that has worked incredibly well.
I mean if you go to the next slide, it led to WisdomTree launching 20 funds in a day. We did the whole developed world in a day, and then we, shortly after that, followed it up with emerging markets, all around this concept of dividend weighting, and WisdomTree was born.
It was such an elegant idea that not only did I have a strategy that could compete with a Vanguard in the most high-minded way, meaning after a few returns, which is what this is about, but it was such an elegant idea that it allowed me to recruit and bring in Professor Siegel, who was asked by the legendary investor Michael Steinhardt, "Would you validate the intellectual property that this young man is showing me?"
Michael Steinhardt asked Professor Siegel and Professor Siegel, with his great partner and teaching assistant Jeremy Schwartz, they redid all of the work that myself and my co-partner at the time, Luciano Siracusano, we were working on. They redid all of our tests. All I can say is I'll never forget because I was running out of resources to keep the dream alive.
Professor Siegel said to Michael Steinhardt that, "This is the best approach to indexing I've ever seen." They all came together in such an elegant way that WisdomTree was born. We launched our suite of funds using this original methodology. Now they've taken it on to new heights. I mean Jeremy Schwartz, who is the second longest-serving employee at WisdomTree after me, I'm so honored to turn this over to him, to take us on. But that was the original idea, dividend weighting. Really, this is the birth of fundamental weighting or ... I guess you would call it fundamental weighting. So, anyway, Jeremy, why don't you take it on from here?
Well, thank you, Jono. It's been a fun 17 years. So it's been great working with you. Professor, thanks for the great intro. I'm excited to be joining on the book.
What we're going to do today, for the next part of slides, is go into a few of the ideas. You saw DLN with the largest dividend strategy. We'll talk a little bit about that. We have just a few more macro slides, just to introduce that before we get there and tie it into what the professor is saying before we get on the details on what's going into that dividend weighted process.
The first slide is ... The professor commented on his main chart from stocks for the long run, talking about the stock return just under 7% and bonds having 3.5% return over his long-term time periods. Stocks have been consistent, bonds have been declining in terms of their real return. What we show here is the 10-year tips chart ... of their real return. And what we show here is the 10-year tips chart, which now has a 25-year history. It's what people have been flocking to with this fears of inflation. But what you see is the tips yield had gone into crazy territory at negative rates. Just since we did this slide, rates have ticked back positive. We were at 22 basis points positive earlier before this call. So you're getting small positive, but still, if you go back to the real long term data way below the long term averages. So I know the pressor talks about stocks being priced to deliver a little bit below average returns for stocks, but bonds being well below average at zero real return.
And in this challenging period where bonds have this sort of zero, or just slightly above zero real return, we still think it makes a very good case for that. Stocks are the long run type argument today. Now, we're going to go into why dividends for value. So the next slide was one of the central charts from the future for investors when the professor was asking how do you solve for bubbles and his own shift going from being straight Vanguard back to when they opened their doors towards embracing a value tilted approach and WisdomTree in particular. This chart was from the future for investors that looked at Quintiles of the S&P 500, going back to 1957 and that original S&P 500 paper that we did back 20 years ago.
And what you found was the most expensive stocks, those with the lowest dividend yields had underperformed the S&P with a much higher volatility and the highest dividend stocks, the cheapest stocks on this valuation multiple had outperformed and with a lower beta. And so like a 91 beta for low price stocks, high dividends stocks, and the most expensive part being a much higher beta. That is exactly what you see playing out today in the markets, as well as this year. On the next slide, what we show is you saw that at the very end of that last slide, the zero dividend pairs were catching up with the market, but not this year. What you see, like what's been positive. This was done through April and the high dividend part of the market was actually positive.
This corresponds to the ETFDHS that was one of those original 20 funds, a billion dollar fund. DLN, which is the large cap given fund we're going to talk about more. You saw that was down a little bit more than 4% at the index level where still better than the traditional value indexes and sort of much less than the S&P, which was down 13 when we put this slide together. So you definitely see value with the dividend bias working particularly well. And a lot of people think you go to quality in down markets. Really depends how you define quality. You see, through the MSCI factor lens, the MSCI quality index was down 2% more than the S&P 500 largely because it became a tech growth basket, more so than a value dividend type basket. And so certainly even quality with the dividend orientation was very important than just traditional quality during this down market.
So I think you are seeing for this current macro to that first poll question, people were thinking, right, what is happening? What is protecting for the current environment? Dividends have a unique place for this moment. One of the questions we would get quite often is our dividend is just like a bond proxy. So the very next slide is titled here, Don't Fear These Higher Interest Rates as Depressing High Dividend Stocks, because you do see the correlation structure has been very different. If you go back when WisdomTree first started, there was this fear that maybe dividends were a bond substitute, utilities being associated with the rates going higher. Maybe that puts pressure on high dividend stocks, but it's a very different macro moment, what we're facing with this inflation risk today. And I'm going to talk about how the dividend stream itself has changed, which creates some of these changing correlation dynamics. But I think whereas the old rule thumb might have been higher rates, not great for dividend stocks, that was the case 15, 20 years ago. It's certainly very positive as you saw with high dividend stocks being the factor this year.
All right, so let's go into details on how we construct WisdomTree's dividend approach. So with DLN the largest of our dividend funds today from that original 20 that we launched back in '06, we're going to get into the details, but I think we might have a poll question before that.
Exactly. Yes. Before we get into the details of that fund, I want to throw up our second polling question. The broadcast there up on the screen should be appearing for you. So the question is this, what is your view on value investing? Do you... Oops, I just did something there. That was me. Human error on my part. There we go. What is your view on value investing? Will it outperform over the next 12 to 24 months? Will it underperform over the next 12 to 24 months? Or is it not relevant at all? Is it not a relevant investment strategy any longer? So I will give you a second or two to take a look at that and make your selection. And then we all see what the survey says. I kind of have a feeling I might know what the audience of this webcast might suggest, but let's see what they say. Goodness, almost 90% say that dividend, excuse me, that value investing will continue to outperform over the next 12 to 24 months. Jeremy, How do you think that lines up with the WisdomTree house view?
Well, and from how we started, we've increased the percentage. So the professor started by, then maybe some of our slides have started convince them the macro moment. So we've got a little bit more with value versus the first dividend question, but I guess we'll talk through a little bit on the details. Like why is DLN of value? So the process as Jono talked about creating the Wilshire 5,000 of dividends. We start with all the publicly traded companies in the US. We screen to the dividend paying companies. And we also hear for this one, then have a market cap screen. So one of the original ideas was having pure size cuts. Some of the other fundamentally weighted strategy at the time were creating the largest by a fundamental factor. And then you would get size tilts.
So you would move to small caps to dip down to the say, thousand largest bio fundamental factor. This is the 300 largest companies by market cap. So large cap purity, but with a dividend rebalance and weighting. And we've since added some of further risk screens to try to help control for the most risky value trap type companies. And I think further makes these dividends more robust, but the process started with just simple dividend weighting rebalancing back to that once a year. And so what we're going to show on this very next slide is what that looks like for the largest 20 dividend payers. And I'm going to talk through how some of these sectors have shifted. What you see is the dividend stream weight. So example of Microsoft pays about 18 billion of dividends and its weight in DLN is just over 4.2%.
Now, its market kept weight was 6%. So you could see you're a little bit underweight Microsoft, you're a little bit underweight Apple. Apple had 14.4 billion of dividends, about 3.6% weight when it was about double the weight in the S&P closer to 7%. Those are two of the really only big negatives on this screen. All these others, you see positive overweights to the S&P 500. So things like Exxon and Chevron for the large oil move that's happening this year, that the big positive sectors happening. You could see overweights to those sectors. You see the consumer staple companies, Procter & Gamble, Coca-Cola, Philip Morris, those are above average on a dividend weight. You could see above average yield. And certainly when you're weighting by dividends, you have to pay a dividend. So we don't have the Amazons and Googles and Netflixes in the world.
And so those do have zero weight in a dividend weighted strategy. That's one of the reasons why Morningstar has classified this, just shifting it towards value. All the dividend weighted original ETFs have been given these value oriented classifications and in the US in particular where you have more non-payers, that's more apparent. But this rebalance happens once a year. And for the US strategies that we talk about here, that rebalance happens every December. So you're in these positions until the next rebalance and that price adjustment mechanism is one of the ways you control for valuation things that are going up price. So if Microsoft started at 4%, but it doubled towards 8% relative to everybody else. You're going to bring it back to that dividend weight once a year. It's not a continuous, it's a once a year rebalancing, and people have questioned, do you do that more often? Should you do it quarterly or semi-annual?
Really what we're trying to do is long term changes in price versus valuation and reflect those fundamentals once a year. For value strategies you don't want to keep buying the losers all the time, which is a very negative momentum strategy. You want to do it consistently slowly once a year annual process was what we found to be the most robust process. Now, when we started back from the original days when Jono created the indexes and we validated it, we wrote a white paper. All you had was a back test. Now you have real time results. And what you see on this next chart is for DLN, it's been a very consistent strategy. We plot on this X-axis, the Russell 1000 value I mentioned, Morningstar has it in the value category. And on the Y-axis is DLN returns.
So the 45 degree line is basically when you would've matched the value indexed returns. When you're above the line, you're out performing. When you're below the line, you're underperforming. There's been 52 rolling three year time periods. This is done on a rolling basis, every three year periods and 80% of the time you were above the line. So what that tells you is it's pretty consistent three year track record outperforming. And I'd say it's also consistently reducing volatility. So I think pretty strong, consistent results over that long term.
Now, for this unique market environment, the professor's talking about inflation risk and valuations is one of the key drivers. The next slide shows what is the valuation? So this was done just as of a few weeks ago. Obviously the markets have come under pressure a little bit more, so even lower multiples today. But if you took the S&P and used the forward earnings estimate, it was right on 19 times earnings. Tech has been higher multiple. So you take out tech and you're at 17.6. You could say, well, is this DLN just an X tech strategy? No, you see 15.2 considerably below that of the X tech and considerably below the S&P 500. So you definitely see the strong valuation discipline that is really the widest today going back. I mean, if you go back, there was times in 2012, 2013, you weren't much cheaper than the market. I remember people was talking about how the premium for dividend stocks was causing some of the dividend stocks to be more expensive.
That gap has widened to really record valuation discounts going back the last 15 years, 16 years we've been in business. So I think that is encouraging if you're looking for, how do you get a value tilt? Value with dividends provides a very nice, healthy discount. Now, to my point on the dividend stream being different and the correlation dynamics changing, the next slide shows just how different the dividend stream has been from when we launched back in '06 at the original idea to where it is today. And I think one of the things you could say is you could feel much more confident that the dividend stream is more diversified today than it's ever been. Back in '06, 30% of dividends came from the financial sector. Only 5% came from the tech sector. Today, tech is now, it's had the single greatest increase in dividends and really double the healthcare sector, which is also a pretty big sector at 13% of now all the dividend stream weights 8% a year. Tech has been growing 14% a year.
It's one of the reasons why you see some dividend growth strategies look backwards to say, if you raised dividends consecutively for 10 years, the aristocrats goes 20 years. We're including all the dividend payers when they start paying. And when they first start paying is when they could have some of the fastest growth rates. So I think that's one of the reasons as we thought about other strategies, where we were trying to be inclusive of the dividend stream. But I think you could say it's more robust today. Energy, you see here at 8% of the dividend market. It's only 3% of the market cap weighted market. So because they were in a bare market for a decade, you saw energy weights collapse and collapse, and a market cap weighted strategy. They don't add based on any fundamental, they just ride the market cap down.
Dividend streams are going to balance back to that stream. So we have more than twice the weight in energy. You're certainly underweight tech a bit, but it's in the dividend paying part of tech, which is more conservative. And I think you get a very nicely rounded dividend stream today compared to where it was before. So I think that's one of the key things. The next slide, the professor talked about 5% returns for the broad markets. The percent of return coming from dividends has been going down as people have been doing more buybacks. And even in the Russell 1000 here, you see 1.3% dividend yield.
And even in the Russell 1000 here you see 1.3% dividend yield. The buyback yields are higher, but companies have gone to buybacks. In our dividend weights you do get more than even the Russell value index. So I mentioned you saw the performance being better than other value, but you also see this dividend yield as being more dividend based, higher dividends in a value cut. So you're talking about the true nature of being a value basket with DLN, that two and a half percent average index yield shows good valuations today.
The high dividend cut, this was the one that I showed on the previous factor return being positive on the year. That goes to DHS, which was the ETF tracking the top 30% of the market by yield, that has a further yield screen, in addition to just selecting the top largest companies. So you can get a further 120 basis point yield when you go to things like DHS in the particular high dividend segment. But really, we launched 20 funds in one day. There's a lot of different ways to slice and dice the dividend market. We wanted to give you two examples today with DLN as the large cap, DHS as the highest yielding subset, depending on where you want to go on the dividend curve, both ways, get you value baskets. One's deeper value with DHS, one's more core large cap value with DLN, but both very good ways of looking at that dividend market.
We're going to close with the professor on how he's thinking through the macro and tied to his current outlook.
Professor Jeremy Siegel:
Thank you very much…I hinted at some of these conclusions from my discussion earlier, but let me try to summarize them. And then we're going to have, I think, one poll question, and then we're going to go to your questions.
I said the fed is really far behind the curve, and they should really accelerate it. Really they should have said to ... It goes back actually to President Trump's second stimulus. First stimulus was needed. Second stimulus, part of it was needed, but that's when they should have started saying, "We're not going to fund all." But the Biden stimulus, they said, "We're just not going to buy all that. You go to the market." If they had done that back then, their yields would've risen back then and we wouldn't be in the situation we had today with all the money. Basically what they just did is they bought all the government bonds and they put money in everyone's pockets, and now everyone's spending. That's what it goes back to.
So they got to raise interest rates at least to neutral, but a lot of that damage is already done. A lot of high inflation is in the pipeline for another two years, at least. Stocks are good, long run, but rocky during the tightening. I think the second half of the year is going to be better than the first. That's not saying much now, but when I said it in December people were wondering. But I think, again, one reason why I'm not thinking is it's going to be a devastating bear market is because earnings are really coming in. And I expect them to come in. There's no recession in sight. And firms are really passing on the prices. There's no question about it. Their margins are going to stay strong.
Treasuries, maybe they'll go to three and a half to three quarters. Not much more. There's a tremendous hedge demand for treasuries that keep it up. Now, on May 4th with the S&P at 4160, I'm looking right now, it's 3974. It's broken below. So selling it around 17 and a half times earnings right now. 230 next 12 months. That's an earnings yield of 5.5%. Now it's about 5.7 if I'm looking at today's figure. Wow, very unbelievably reasonable relative to a zero real rate in five.
And even if we have a recession, people say, "Oh what if we have a recession?" So earnings are down 15%...for one year. Tell me how much a present discounted value should go down as a result. Not much. Well I'm echoing what Jeremy just said. Value stops outperforming. People are going to be spending, waning COVID fears, rising yields. These are returns that are way positive, not 20 basis points like the 10 year tips.
The dollar may have peaked. We have a huge trade deficit. So a lot of dollars are going abroad, and these interest rates ... The short rate's going to go higher. Long rates may not go that much higher. We may invert the term structure.
I do say that, by the way, we may invert the term structure. Point number three. I don't think inversion necessarily in our future means recession. Even though in the past, it has. Mild inversions are going to be much more common, we're going to have a much flatter type of term structure in the next 20-30 years than we had in the last 20 or 30 years, because the long hedging demand keeps that treasury. It's not going to go back to the five, 6% range it used to be. I still think equities are the place to be. Tina still holds. Real assets are the answer in an inflationary environment. With that, I think we have one more polling question, and then I think we can go to your question.
Absolutely. You hit the nail in the head there. But right now it's about time for us to move into Q&A, and we have a lot of questions coming in. That's fantastic. Really excited to get into some of them. If we don't get to yours, don't worry. Someone from WisdomTree will get back to you personally. I wanted to start with this one professor. We got a question here about where you believe the the terminal fed funds rate is for the cycle, and how do you think rising rates are going to impact value throughout the rest of the year?
Professor Jeremy Siegel:
Yes. Well, I think that Jeremy answered that. We're in a case where really the rising rates have not been bad for ... They're good for dividend paying stocks, because treasuries still have not caught up to the inflation rate, and stock cash flows will definitely. How high will the fed funds rate have to go? I keep my eye on the money supply that Powell does, but I wouldn't be surprised if we have to go three and a half to 4%, and maybe four and a half, at which point you're going to slightly invert the term structure.
Again, we've had two months of slowing growth. I want that to continue, but they're going to have to keep on rising rates I think above the neutral. At least a point, and maybe two above neutral to make sure that those money supply growths remain recent.
Okay. We've got another question. A couple of questions here from folks asking, again, this is for the professor. You've mentioned that the fed made a pretty big mistake, the third biggest mistake in their history in what they did with the money supply. What should they have done instead?
Professor Jeremy Siegel:
Well, what they should have done is told both Trump, maybe in the second expansion, but the first expansion, we had to do it. That pandemic just froze everything. I'm not going to ... The second expansion they said, "We are not going to finance all of this. You've got to go to the bond market. If you want these programs, fine, but finance them." And certainly Biden's first, we didn't need that stimulus. The fed should have definitely stood up and said, "Okay, you passed it. You go to the bond market and get 1.5 trillion." Well, then you would've had the interest rates rise then, rather than go into an environment of interest rates where the long rate's 50 basis points and 100 ... Of course you're going to get these bubble stocks, and these meme stocks. Money costs nothing. It's negative cost after inflation. So people are going to buy anything.
I blame them for creating the bubble. That's when they should have stood ... The second Trump they should have began to say, "Go to the bond market." The first Biden they should have said, "You go to the bond market." And then the rates would've risen, and then we would not have had ... I'm not saying we're not going to have a lot of inflation, because the first injection was substantial. But we would have much less inflation than we're eventually going to have as a result of the money that they need.
Very good. All right. So this is a question-
Professor Jeremy Siegel:
I just want to also ... Oh.
Professor Jeremy Siegel:
I just want to just say that in the first pandemic, remember the Spanish Flu of 1918, it spread mostly in Philadelphia, and it spread at a liberty bond rally, where the government was raising bonds for World War I. They didn't have a fed back then. They didn't have a fed to go to that could buy those bonds. It's sort of ironic. Here we did have a fed to buy those bonds, and okay, in the first time. But then they kept on buying and buying and buying. That's my thought with the fed.
That's a very good point. All right. So this question is for Jono or Jer. Value investing in the recent past has been concentrated into one or two sectors, such as energy. Can this continue as energy prices retreat?
Jeremy, you take it.
Yeah, I put out a thread on Twitter recently on this high dividend. A lot of people think that high dividend performance was just the energy sector, and what I showed was, okay, so high dividend stocks when I did it as of April, was 1800 basis points ahead of the market, and a third of that 1800 basis points came from energy. But it was really every single sector the high dividend stocks were starting to outperform. So it really wasn't just energy. It actually was contribution from the high dividend factors across every sector. And again, in DLN that we talked about, energy was only 8% and had been holding up eight or 9% better than the S&PP this year. So it's really not just one sector. That dividend stream today in broad dividends is more diversified as we pointed out, than really ever. No dividend sector more than 20% of the entire dividend stream. So I do think it's pretty diversified today.
Very good. All right. We have a question here, this is actually probably best for you, Jer. Why 300 stocks in DLN? Why not 30? Is there really an advantage to having that broader portfolio?
I guess, again, starting from what Jono said, the Wilshire 5000 of dividends, the broad index of 1400, the dividend pay universe is a little bit more narrow than ... We have a second index that came out in '07, all the profitable companies. That usually starts with around 2000 companies. The large cap there, we can do a 500 to compete with the S&P 500. So we have, in the earnings family, that 500 largest. But in the different family, since you're starting with a little bit more narrow universe, we do want to create room to create the mid and small cap baskets. And so you have about 1000 companies, a little bit more than 1000 companies left over after you do the 300 largest.
And then we wanted to create a consistent methodology. In those two other segments we're doing a ratio of total market cap of top 75, bottom 25%. But it was really to create scalable indexes. It wasn't 500 like we do in the profitable company universe, just because there's less dividend payers. But you still get pretty broad coverage. I think it's closer to 80% of the market now in the US pays it, if you do weight of the Russell 3000, pays a dividend. So you still get broad coverage, but not as much as a total market or profitable company universe.
Great. Well unfortunately everybody, we had so many questions, and unfortunately we are at the time that we have available for today. If we didn't get to your question, don't worry. Again, someone from WisdomTree will get back to you after the broadcast. So thank you so much for attending today's webcast. A big, huge, special thank you to Professor Siegel, Jono Steinberg, and Jer Schwartz from WisdomTree Asset Management for joining me today.
As a reminder, the demand version of this presentation will be made available to you shortly. You should receive an email in your inbox notifying you tomorrow when it goes live. And yeah, thank you, and I look forward to seeing you again next time.