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Advisors know that when it comes to equity allocations, beating the S&P 500 is difficult. Really difficult. As the SPIVA scorecard confirms, beating the benchmark domestic equity gauge is a task few highly paid active managers accomplish.
Even fewer accomplish with the regularity needed to impress astute clients looking for long-term positioning. Something else advisors know: Dividends, particularly when reinvested over lengthy holding periods, matter.
As advisors know, not all dividend payers are created equal. This is something not all clients are cognizant of, meaning this is a credible value-add conversation. Acknowledging that not all dividend-paying firms are the same is critical in inflationary environments because clients need income AND exposure to companies and strategies that thrive when consumer prices surge, as is happening today.
Lack of dividend uniformity is apparent when it comes to index funds and exchange traded funds. That is to say that as the space has evolved, some funds are setting themselves while offering advisors the opportunity to present clients with S&P 500-beating ideas, including the WisdomTree U.S. Quality Dividend Growth Fund (DGRW).
Deep Dive on DGRW
Now one of the largest ETFs in the WisdomTree stable, the $7.75 billion DGRW debuted in May 2013, indicating its track record is extensive and worthy of examination at time when dividends are growing and back in style.
As its name implies, DGRW emphasizes quality sources of dependable payout growth, which history confirms is a recipe for beating the broader market. The ETF has done just that.
“Our ETF has outperformed since its inception in May 2013 and in many periods since then, as highlighted in figure 1 (5Y, 3Y, 2022),” notes the issuer. “We believe one of the reasons for this success is that the ETF’s investment process is rooted in this academic literature and focuses on a systematic selection of a diversified basket of highly profitable companies with solid dividend-paying credentials, leaning heavily into the quality and high-dividend factors.”
One of the most notable points about DGRW’s out-performance of the broader market since inception is that it coincided with a lengthy run of market-beating returns courtesy of mega-cap growth stocks, the bulk of which aren’t dividend payers.
“Another often-mentioned explanation is that the U.S. market is increasingly concentrated in large-cap tech stocks and active managers suffer from underinvestment in those stocks. This would imply that it is not possible to outperform the S&P 500 without taking even bigger bets on tech stocks and, in particular, non-dividend-paying tech stocks like Amazon, Tesla, Meta and Alphabet,” adds WisdomTree.
Quality, Profits Matter
DGRW’s full name also implies an emphasis on quality and while there’s much debate about what defines the quality factor, it’s impossible to argue that profitability is part of the equation.
Likewise, it’s not up for debate that when it comes to harnessing dependable dividends, profitable companies generating ample free cash are the ways to go. Conversely, payouts tied to money-losing firms are vulnerable to cuts or, worse, suspensions.
“Over rolling 10-year periods, we can see that the quality factor has exhibited outperformance most often (88% of the time versus the market) and has the smallest “worst underperformance” number of all factors. It suggests that quality is a true ‘all-weather’ factor, and that is the reason why WisdomTree decided to build its “core” equity exposure ETF around that specific factor,” concludes WisdomTree.
Indeed, quality helped DGRW beat the S&P 500 handily last year, over the trailing three- and five-year periods and since inception.