Dividend exchange-traded funds (ETFs) are becoming increasingly popular—and increasingly plentiful. And while you already knew that all dividend growth funds are not the same, it may surprise you to discover just how different they really are. We believe it is critical to understand the differences between the indexes they track and the methodologies they use in order to review and compare them on an “apples to apples” basis.
For example, did you know that many of the most popular dividend growth ETFs use backward-looking screens that require 10–20 consecutive years of dividend growth before a company is eligible for inclusion? While this may sound like a good idea, it can exclude both new dividend payers and companies with the fastest growing dividends out of your portfolio for a decade or more.
This simply doesn’t make sense to us. Take Apple, for example. Apple is now the second-largest dividend payer in the United States. And with the record earnings the company has recently reported, it could easily move up to first place soon. But if your ETF uses backward-looking screens, as most do, you likely won’t see Apple in your portfolio until 2023 (at the earliest).
So, how do you know if your ETF uses backward-looking screens?
- Look for the benchmark index
- Review the index methodology
- See if they require a set number of years of increasing dividends
But WisdomTree Europe’s UCITs ETFs, such as the WisdomTree U.S. Equity Income ETF (DHS), are based on Indexes with a methodology that not only best captures the trend of the dividend paying equity market universe, but importantly allow investors to capture the trend early on. One of these trends unfolding before us is the growth in the number of stocks within the technology sector that is paying out dividends (see chart 1). For instance, we estimate that - within Europe’s equity technology sector, which comprises stocks with a market cap of at least USD 200M - 42 of the 72 stocks paid cash dividends in 2000. Today, the number of technology stocks in Europe has risen to 179, 105 of which paid a cash dividend in 2014. The rise of dividend paying technology stocks is also evident in the US, when in 2000 only 12%, or 30 stocks paid a cash dividend, while last year, that percentage has risen to 26% (or 130 stocks).
The WisdomTree screening methodology requires a 12 month cash dividend history for stocks to be eligible for index inclusion, this is an effective approach to enable investors to capture the trend in the equity markets early on. Amongst the dividend strategies on offer, the basket of stocks is large (including several hundred companies) and well-diversified, resulting in dividend yield premium and improved risk-adjusted returns which can be achieved over market-cap based ETF strategies.
- Investors sharing this sentiment may consider the following UCITS ETFs:
- WisdomTree US Equity Income UCITS ETF (DHS)
- WisdomTree Europe Equity Income UCITS ETF (EEI)
- WisdomTree Emerging Markets Equity Income UCITS ETF (DEM)
- WisdomTree US Small-cap Dividend UCITS ETF (DESE)
- WisdomTree Europe Small-cap Dividend UCITS ETF (DFE)
- WisdomTree Emerging Markets Small-cap Dividend UCITS ETF (DGSE)
All data is sourced from WisdomTree Europe and Bloomberg, unless otherwise stated.
WisdomTree Europe Ltd is an appointed representative of Mirabella Financial Services LLP which is authorised and regulated by the Financial Conduct Authority. The value of an investment in ETPs may go down as well as up and past performance is not a reliable indicator of future performance. An investment in ETPs is dependent on the performance of the underlying index, less costs, but it is not expected to match that performance precisely. ETPs involve numerous risks including among others, general market risks relating to the relevant underlying index, credit risks on the provider of index swaps utilised in the ETP, exchange rate risks, interest rate risks, inflationary risks, liquidity risks and legal and regulatory risks. ETPs offering daily leveraged or daily short exposures (“Leveraged ETPs”) are products which feature specific risks that prospective investors should understand before investing in them. Higher volatility of the underlying indices and holding periods longer than a day may have an adverse impact on the performance of Leveraged ETPs. As such, Leveraged ETPs are intended for financially sophisticated investors who wish to take a short term view on the underlying indices. As a consequence, WisdomTree Europe Ltd is not promoting or marketing BOOST ETPs to Retail Clients. Investors should refer to the section entitled "Risk Factors" and “Economic Overview of the ETP Securities” in the Prospectus for further details of these and other risks associated with an investment in Leveraged ETPs and consult their financial advisors as needed. Within the United Kingdom, this document is only made available to professional clients and eligible counterparties as defined by the FCA. Under no circumstances should this document be forwarded to anyone in the United Kingdom who is not a professional client or eligible counterparty as defined by the FCA. This marketing information is intended for professional clients & sophisticated investors (as defined in the glossary of the FCA Handbook) only. This marketing information is derived from information generally available to the public from sources believed to be reliable although WisdomTree Europe Ltd does not warrant the accuracy or completeness of such information. All registered trademarks referred to herein have been licensed for use. None of the products discussed above are sponsored, endorsed, sold or promoted by any registered trademark owner and such owners make no representation or warranty regarding the advisability on dealing in any of the ETPs.  Number of downgrades and upgrades are based on all ratings types by S&P  Based on WisdomTree Europe’s own research for screening the emerging markets corporate bond universe, using Bloomberg data.