Most indexes, and the exchange-traded funds (ETFs) that track them, weight stocks by market capitalization—a method that assumes price and market valuations are always the best measure of true value. But as you have likely experienced, stock prices can and do deviate from their underlying value for many reasons. We believe that fundamentals such as dividends offer a more objective measure of a company’s health, value and profitability than stock price alone. And we pioneered Modern Alpha™ ETFs and the concept of weighting by dividends in order to enhance performance potential and help investors generate more income while reducing risk.
Why Weight by Dividends
At WisdomTree, we believe dividends provide numerous advantages. Consider that dividends:
- Represent the health and strength of a company
- Cannot be manipulated by accounting schemes
- Can provide support in down markets
- Have outperformed inflation AND provided the bulk of the market’s return since 1926
- Are being paid in larger amounts and by more companies than ever before
Additionally, we believe that stocks with higher dividends can outperform others. In the chart below, Wharton Professor Jeremy Siegel, a senior WisdomTree Advisor, demonstrates that stocks with high and higher dividend yields significantly outperformed the S&P 500 AND the stocks with low and lowest dividends. We believe weighting by dividends can help to manage valuation risk and magnify the effects that dividends have on risk and return characteristics.
Dividend Yield and Relative Performance, 1957–2018
Source: Professor Jeremy Siegel, The Future for Investors (2005), source updated for 2018 data. Uses the S&P 500 universe as of 12/31/18. Average annual total returns, 1957–2018. Each stock in S&P 500 is ranked from highest to lowest by dividend yield on December 31 of every year and placed into “quintiles,” baskets of stocks, with 100 stocks in each basket. The stocks in the quintiles are weighted by their market capitalization. Top and bottom quintiles are shown for simplicity. The dividend yield is defined as each stock's annual dividends per share divided by its stock price as of December 31 of that year. p.a.=per annum. You cannot invest directly in an index. Historical performance is not an indication of future performance and any investments may go down in value. The above numbers include backtested data.
How We Weight by Dividends
Our Modern Alpha™ approach combines the performance potential of active management and the benefits of a passive index approach with all the structural and cost advantages of ETFs to create strategies designed to perform. For our dividend ETFs, we weight companies by the Dividend Stream® rather than by market cap. As you can see in the hypothetical example below, using the same initial investment and the same three stocks, the dividend-weighted portfolio is able to generate 30% more income.
Rebalancing Based on Valuations
Perhaps the most important piece of our Modern Alpha™ approach is the regular rebalance.
Periodically, we not only adjust weights back to relative value, but we also eliminate any companies that have stopped paying dividends. We believe this is critical to managing valuation risk and maximizing the effect dividends have on performance.
WisdomTree Re-balancing Methodology
Our Domestic Dividend Family
WisdomTree’s Modern Alpha™ family of dividend-weighted strategies combines the performance potential of active investments with all the advantages of ETFs. These strategies are designed to help generate more income, provide strength during down markets, reduce risk and enhance overall returns.
WisdomTree U.S. TOTAL DIVIDEND FUND
The WisdomTree U.S. Total Dividend Fund offers investors the income and growth potential of small-, mid- and large-cap U.S. equities.
WisdomTree U.S. LARGECAP DIVIDEND FUND
With the WisdomTree U.S. LargeCap Dividend Fund, investors can access the long-term growth and income potential of large- cap dividend payers.
WisdomTree U.S. MIDCAP DIVIDEND FUND
By focusing on dividend payers, the WisdomTree U.S. MidCap Dividend Fund helps investors leverage the outsized growth potential of mid-caps with less downside risk.
WisdomTree U.S. SMALLCAP DIVIDEND FUND
The WisdomTree U.S. SmallCap Dividend Fund provides investors with the growth potential of small companies, with the downside protection of dividends.
WisdomTree U.S. HIGH DIVIDEND FUND
By focusing on the high -dividend -yielding U.S. companies, the WisdomTree U.S. High Dividend Fund offers investors the potential for higher income.
WisdomTree U.S. DIVIDEND EX-FINANCIALS FUND
The WisdomTree U.S. Dividend ex-Financials Fund offers investors the high -income -generation potential of high -yielding U.S. dividend payers outside of the financial sector.
WisdomTree U.S. SMALLCAP QUALITY DIVIDEND GROWTH FUND
The WisdomTree U.S. SmallCap Quality Dividend Growth Fund helps investors gain exposure to the small American companies that are well positioned to grow their dividends the fastest.
View our blog to learn more about Dividends ETFs.