Investing in a dividend-paying equity ETF continues to be one of my favorite passive stock strategies. As I have previously highlighted, “dividend payers have clearly outperformed non-dividend payers over a very long period time”, having achieved the feat with even lower volatility.
Recently, I looked at State Street’s SPDR Portfolio S&P 500 High Dividend ETF (SPYD) and concluded that it was a good starter fund for passive investors looking to collect rich dividend payments. However, my preferred dividend ETF, the one that I have remained invested in the longest, is the WisdomTree U.S. Quality Dividend Growth Fund (DGRW).
Unlike its State Street counterpart, WisdomTree’s ETF is more focused on the quality and growth prospects of the companies whose stocks the fund holds, rather than on the size of the dividend payments. To be more specific, DGRW’s “growth factor ranking is based on long-term earnings growth expectations, while the quality factor ranking is based on three-year historical averages for return on equity and return on assets”. The approach has the intuitive benefit of lending a more conservative profile to the portfolio in detriment of a higher yield.
In my view, WisdomTree’s methodology more closely mimics the investment decision process that most value investors would use in picking stocks for their portfolios. I am willing to bet that few dividend seekers actively managing their money would choose to blindly buy the highest yielding stocks in the market without much regard for fundamental factors like ROE and earnings expectations. Therefore, DGRW seems to have a more appealing “smart beta” feature that SPYD and possibly most other dividend ETFs do not possess.
In terms of key fund characteristics (see below), DGRW is large at an AUM of $2.8 billion and highly liquid at an average daily traded volume of over 260,000 shares – two features that I find important in an ETF. Good news for income-seeking investors, its dividend yield of 2.3% is superior to the S&P 500’s 2.0%, although nowhere near as rich as SPYD’s 4.3%. Interestingly, the 14.9x average forward P/E of stocks contained in DGRW is about two turns lower than that of the S&P 500, hinting at the fund’s value characteristic that is more typical of dividend stocks. The valuation multiple, however, is higher than SPYD’s 14.1x, possibly suggesting DGRW’s lower exposure to yield traps currently selling at deep discounts.
Source: WisdomTree’s webpage
Since inception, DGRW has proven to be a solid performer. As the chart and table below suggest, the ETF has edged an already robust S&P 500 since early 2013, although only by a slim margin of about 20 bps per year. Not surprisingly, considering my earlier observations, DGRW’s daily returns have been less volatile than those of the broad market, at an annualized standard deviation of 12.6% vs. SPY’s 13.0%.
However, it is still unclear whether DGRW is better capable of dealing with downturns. Its worst daily return so far has been -4.4% vs. the S&P 500’s less pronounced -4.2%, and its worst year (2018) produced a loss of -5.4% vs. the benchmark’s -4.6% – although it weathered the 4Q18 correction slightly better.
Source: DM Martins Research, using data from company reports
I continue to be a fan of passive dividend investing and, within the universe of relevant ETFs available in the market, DGRW is one of my favorite picks. I find it unlikely that this fund will lavishly outpace the performance of the S&P 500, considering the high correlation between their daily returns. But over the long haul, I believe DGRW will continue to be a slightly superior alternative to investing passively in stocks than SPY and even most other dividend funds.
I own a number of dividend-paying stocks in my “All-Equities SRG” and “The 10% Yielder” portfolios — both of which I discuss regularly with my Storm-Resistant Growth community. To dig deeper into how I have built a risk-diversified portfolio designed and back-tested to generate market-like returns with lower risk, join my Storm-Resistant Growth group. Take advantage of the 14-day free trial, read all the content written to date and get immediate access to the community.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.