The purpose of this article is to evaluate the WisdomTree U.S. Dividend Growth ETF (DGRW) an investment option at its current market price. Dividend growth is a strategy I have pushed on my readers for some time, and today is no different. Over the past year, as the market has been volatile, interest rates have declined, and economic growth has been mild, DGRW has been out-performing. This is compared to not just the broader market, but also against high-yield dividend themes. I expect similar out-performance to continue in the short-term, as I foresee a similar macro-environment over the next 3-6 months. Furthermore, DGRW has delivered on its “growth” objective, registering double digit dividend growth year-to-date in 2019. Finally, investors are feeling increasingly bearish about equity performance going forward. I use signals like that as a time to build positions, not sell them, and would use quality funds like DGRW as a way to do just that.
First, a little about DGRW. The fund seeks to “track the investment results of dividend-paying large-cap companies with growth characteristics in the U.S. equity market”. It gives investors exposure to large U.S. companies that have been screened for both growth and quality. DGRW currently trades at $44.07/share and yields 2.27%. I covered the fund this time last year, and recommended it. In hindsight, this was a correct call, as DGRW has performed well over the last twelve months, and has actually bested the performance of the S&P 500, as shown below:
Source: Seeking Alpha
My takeaway here is that DGRW is able to withstand market volatility to a better degree than the broader market, which is what I would expect of a fund with its objective. With further volatility likely on the way, DGRW may be a smart choice for investors going forward, and I will explain why in greater detail below.
Dividend Growth Has Been Robust This Year
One of the best attributes for DGRW is the fund’s dividend, which is why it is constantly on my radar. While the yield is not “high”, the fund offers monthly payouts, as well as a strategy of holding companies that not only pay dividends, but grow them. To me, this is an important characteristic, I feel much more confident in companies where management is able to consistently grow their dividend payouts, as opposed to just sustaining them.
With this in mind, it is important to evaluate DGRW’s actual performance on this growth metric, to see if the fund is delivering in its underlying promise. Fortunately, for at least the first three quarters of this year, DGRW passes this test with flying colors. To illustrate, the distributions paid so far in 2019, compared to 2018, shown in the table below:
|2018 Jan – Sept Distributions||2019 Jan – Sept Distributions||YOY Growth|
Source: Wisdom Tree
As you can see, DGRW has delivered strong dividend growth this year. While the fund’s share price rise has kept the yield to a relatively low level, the apparent growth gives me a lot of confidence in the underlying holdings of the fund. Furthermore, while a 2.3% yield is not normally too impressive, we have to consider that interest rates have been on the decline. With the Fed lowering rates in 2019, coupled with the market’s expectation of further easing, DGRW’s growing dividend stream looks even more attractive indeed.
Interest Rates Remain A Tailwind For Dividend Payers
As I alluded to in the preceding paragraph, a primary reason for remaining bullish on dividend growers specifically is the outlook for interest rates. DGRW, and funds like it, offer growing income streams at a time when risk-free rates are declining, which is a clear advantage. As rates have declined this year, DGRW has benefited, which is one reason why the fund has seen market beating performance. Therefore, we should consider the interest rate outlook going forward, to help determine if similar performance should be expected.
Fortunately, for DGRW investors, lower interest rates are being expected by the market right now. While we don’t know for sure if the Fed will continue to lower rates by year-end, investors clearly think they will. To gauge this expectation, consider futures data compiled by CME Group. Currently, investors are placing an 80% probability on another rate cut at the October 30th Fed meeting, as shown below:
Source: CME Group
Furthermore, the data is suggesting the potential for another .25 basis point cut during the December meeting, with a probability just under 37%.
Clearly, investors anticipate interest rates to decline further. In my view, this is a catalyst for equities as a whole to move higher, but it is an especially important tailwind for funds like DGRW. With treasury yields potentially moving lower, DGRW’s growing dividend stream should see its spread against treasuries widen by 2020. That is good news for investors in the fund.
What About High-Yielders? Let History Guide You
Of course, we do not invest in DGRW in a vacuum, and there are other investor themes to consider as a play on lower interest rates. For example, investors may consider high-yielding stocks or funds, as the comparative income offered by those investments will also look more attractive as the Fed cuts interest rates. While I certainly believe high-yielding funds can have a place in most portfolios, I want to highlight that I prefer dividend growers absolutely, but especially during a periods of declining rates.
My reasons for this are simple. Companies that are able to grow their dividends through all economic cycles have signaled they are able to stand the test of time. While they may still offer negative returns in recessions or bear markets, their dividend-paying resiliency tells me the companies will emerge just as strong post-recession, and perhaps in even a better place compared to their competition. While the same could also be true of high-yielding companies, consistent growth over time gives me more confidence than an absolute high-yield at any given moment. For one, a stock could simply be offering an above-average yield because their share price has been hammered due to declining investor confidence, falling margins, or regulatory pressures, etc. Therefore, while I view dividend growth almost universally positively, the same cannot be said for the high-yield characteristic.
Aside from that macro-perspective, there is another important reason to consider dividend growers over high-yielders right now. That is performance. As investors are aware, 2019 has been a year of declining interest rates already. Since we can expect a similar market environment in Q4 this year, based on the data above, investors may want to utilize the themes that have been out-performing already this year. One of those themes is dividend growers. And the difference is substantial. To get a sense of this divergence, the graph below illustrates the year-to-date performance of DGRW compared against three popular “high-yield” ETFs, iShares Core High Dividend ETF (HDV), SPDR Portfolio S&P 500 High Dividend ETF (SPYD), and Vanguard High Dividend Yield ETF (VYM):
As you can see, DGRW is handily beating the pack. While its 2% yield is lower than the yields offered by these funds, which fall in the 3-4% range, the share price out-performance has easily made up for that 1-2% yield differential.
My point here is that, while we have an environment with modest economic growth and declining interest rates, DGRW has been leading the way. Seeing I expect a similar macro-environment in Q4 and in the beginning of 2020, I expect continued out-performance of DGRW as a result.
Time For Contrarians?
My final point relates to equity positions more broadly, but is still relevant for those wanting to time an entry in to DGRW. With the market experiencing an uptick in volatility over the past few months, on the backdrop of continuing trade negotiations, an impeachment inquiry, and a looming presidential election, investors are understandably getting nervous. In fact, bearishness among retail investors has been on the rise the last few weeks, and recently hit a reading of 44%, according to a weekly survey conducted by the American Association of Individual Investors (AAII), as shown below:
As you can see, the number of investors with a “bearish” outlook, or those who think equities will decline over the next six months is gaining momentum, at the expense of more bullish or neutral leaning investors. In fact, the current 44% reading is almost 50% higher than its historical average, which tells me the current mood among retail investors is much more pessimistic than it usually is.
With this in mind, readers may be wondering why I would recommend buying an equity position now? Simply, this is a contrarian play, as I like to encourage initiating or adding to equity positions when investor sentiment is leading in the opposite direction. This is a strategy I have noted in previous articles, and did so last year when the market was falling fast and investors were scrambling for cover. While I rarely (if ever) time a market low, adding to equity positions when investors are panicking has proven to be a long-term winning play, and one that has helped generate strong returns over time. While this is no guarantee the next market move will be higher, I see signals like rising bearishness as an opportune time to put some cash to work.
DGRW is a fund I routinely recommend, and this time around is the same. Heading in to 2020, I expect stocks and funds with a dividend growth focus to out-perform. With trade headwinds looming, economic growth under pressure, and interest rates moving lower, I see a market where time-tested companies with a track record of growing their dividend streams as a safer way to play this climate. With strong dividend growth this year and market gains that are besting other dividend strategies, I continue to like what I see in DGRW, and would recommend investors give this fund consideration at this time.
Disclosure: I am/we are long DGRW, DGRO, SPYD. 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.