A dividend ETF focused on profitability and growth

Unlike some of its peers, WisdomTree U.S. Quality Dividend Growth Index ignores dividend-growth consistency.

Alex Bryan 30 November, 2017 | 6:00PM

WisdomTree U.S. Quality Dividend Growth Index (DGR) favours highly profitable stocks with durable competitive advantages that should have the capacity to raise their dividends over time. But it ignores long-term dividend-growth consistency, which reflects managers' willingness to raise their dividends and the stability of the underlying businesses.

This fund targets 300 dividend-paying stocks with high returns on assets and returns on equity over the past three years and a forecast for high earnings growth. Most stocks that make the cut, like  Johnson & Johnson (JNJ),  Microsoft (MSFT) and  3M (MMM), are highly profitable and enjoy durable competitive advantages. Many of these firms would not pass a demanding screen for past dividend growth, similar to the one employed by Vanguard U.S. Dividend Appreciation ETF (VGG). There are pros and cons to each approach. A record of dividend growth is evidence that a firm's managers are committed to a shareholder-friendly payout policy and is a sign of stability. But restricting stock selection to this criterion excludes many emerging dividend payers and ignores forward-looking information about the sustainability of dividend growth.

Despite its growth focus, the fund's dividend-weighting approach keeps it in the large-cap-blend section of the Morningstar Style Box. It weights each stock based on the value of dividends it is expected to pay over the next year. This causes the fund to overweight stocks that are cheap relative to their peers based on dividends. It also forces the fund to trim positions in stocks that have become more expensive relative to their peers and increase exposure to those that have become cheaper when it rebalances.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
3M Co160.43 USD-5.38
Johnson & Johnson143.36 USD-3.90
Microsoft Corp199.43 USD-0.48

About Author

Alex Bryan

Alex Bryan  Alex Bryan, CFA, is director of passive strategies for North America at Morningstar. Before assuming his current role in 2016, he spent four years as an analyst covering equity strategies. He holds an MBA with high honors from the University of Chicago Booth School of Business.

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