When it comes to income-based investments, choices are limited, as current prevailing interest rates are at historic lows. Japan and Germany are in negative yields on their sovereign debt and US 10-year treasuries are in the 1.3 percent territory. These unprecedented circumstances leave most income focused investors scrambling for alternatives. Corporate bonds and junk bonds have seen enormous amounts of demand increase, in spite of commensurate expanded risk. Preferred stocks have also seen new interest, as dividend yields outpace those of bonds, as have dividend paying common stocks.
Mutual Funds and others categorized in the growth and income sector accumulate portfolios of dividend paying stocks in order to capture the upside market appreciation for the growth portion while collecting the dividends to supply their shareholders with the income component. A majority of these blended fund managers use historical dividend statistics to analyze and determine their selections. The focus is on steady and uninterrupted quarterly dividends.
An ETF Option
However, this looking backward protocol has downsides, as evidenced by any funds who held General Motors (NYSE: GM) stock before the government bail out can attest. Wisdom Tree US Quality Dividend Growth Fund (NASDAQ: DGRW) is an Exchange Traded Fund (ETF) that is somewhat contrarian in this regard in that it chooses its selections based on anticipated dividend increases in order to meet its targets for yield. While seeming counter intuitive, DGRW's platform basis seeks out those companies in sectors where strong growth prospects are expected to outstrip their expansion needs, hence the rationale that the odds of potential dividend increases are inherently better than the hope that companies with established historic dividends will have a new upswing that will cause a Board vote for a dividend increase.
As an ETF, the DGRW stock selection analysis is predicated on the Wisdom Tree US Quality Dividend Growth Index (WTDGI), a list of 300 stocks which analyzes companies and weights bias towards those sectors with both strong market cap and dividend growth, such as the information technology arena. Dividend coverage ratio must exceed 1.0 and market cap for any company under consideration for inclusion must be a minimum $2 billion.
DGRW Description and Performance Details
The Wisdom Tree US Quality Dividend Growth Fund is an ETF that trades on NASDAQ under the ticker, "DGRW" and is part of the Wisdom Tree family of funds. Total assets are $635.8 million. Founded in 2013, it has a Year to Date return of 5.11 percent and a three year average return of 11.5%. NAV return since inception is 33.98 percent.
It is classified as a Large Blend fund. Average daily volume is 94,000 and the 52-week low-high, as of this writing date, is 25.50-32.27. Current yield is 2.13 percent. Distribution yield is 2.24 percent. Total outstanding shares is 20,450,000. Lead market maker is Susquehanna. Annual holdings turnover is 32%. Average P/E ratio: 16.96. Average Price/Book ratio: 4.55. Average Price/Sales ratio: 1.68 Average Price/Cashflow ratio: 11.06.
Options are available. Annual dividend is $0.67. Distributions are paid monthly. This year, the average has been between $0.05 and $0.065 per share. All holdings are 100 percent US securities.
With 100 percent of the portfolio invested in growth oriented, dividend paying stocks, the DGRW portfolio is devoid of traditional dividend plays, such as utilities or energy stocks, which are less than 1 percent of holdings. Industrials presently account for 20.42 percent, Consumer Discretionary 19.75 percent, Information Technology is 19.21 percent. Consumer Staples at 18.51 percent. Financial Services at 3.3 percent, Basic Materials at 2.96 percent, Communications Services at 1.6 percent and Real Estate, at a scant 0.1 percent, round out the remainder. The relatively puny real estate and banking stock positions are due to comparatively high financial leverage in those sectors, which impacts ROA.
The top 10 holdings within the portfolio are:
- 1. Coca Cola (NYSE: KO) – 4.08 percent
- 2. Altria Group (NYSE: MO) – 3.62 percent
- 3. Microsoft (NASDAQ: MSFT) – 3.25 percent
- 4. AbbVie (NYSE: ABBV) – 2.93 percent
- 5. Apple (NASDAQ: AAPL) – 2.87 percent
- 6. IBM (NYSE: IBM) – 2.37 percent
- 7. McDonald's (NYSE: MCD) – 1.97 percent
- 8. Cisco Systems (NASDAQ: CSCO) – 1.95 percent
- 9. 3 M (NYSE: MMM) – 1.91 percent, and
- 10. Intel (NASDAQ: INTC) – 1.84 eprcent. Bristol – Meyers Squibb (NYSE: BMY) – 1.81 percent (was no. 10 as of end of June, 2016)
At the end of the first quarter, Home Depot (NYSE: HD), and United Technologies (NYSE: UTX) were ahead of Bristol – Meyers, but were subsequently reduced over the past three months.
Although the Fed has indicated possible rate hikes in the future, the stock market is the one that has been making new highs since the election of President Trump. Dividend growth plays are a way for one to have their cake and eat it too.
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