An ETF Recipe For Dependable Dividend Growth

Dividend increase streaks are an important metric for income investors. After all, lengthy streaks of payout hikes imply dependability. However, when it comes to dividend exchange traded funds, investors would do well to look beyond prosaic dividend increase streaks.

The WisdomTree U.S. Quality Dividend Growth Fund DGRW proves as much. Year-to-date, the $607.3 million DGRW is up nearly one percent. Obviously, that does not sound like much, but consider this: Plenty of dividend ETFs have traded lower this year. Plus, DGRW has outpaced several other well-known dividend ETFs that implement increase streaks as part of their weighting methodology, including the Vanguard Dividend Appreciation ETF VIG.

Although there has been ample chatter about the reprieve granted to dividend ETFs in the wake of the Fed continuing ZIRP, there are some payout funds that, by design or not, are prepared to deliver even if the Fed does increase borrowing costs. DGRW is included in that group. The ETF is also one of the more notable performers among dividend ETFs with some quality factor exposure this year.

“This criterion is pretty simple: We believe that firms expected to grow their earnings faster, all other things being equal, should have greater potential to increase their future dividends faster. We understand that these are only estimates, but we believe that while there may be a lot of noise around a single company’s precise earnings growth, in aggregate the companies with higher growth expectations—we believe—grow faster than those with lower expectations,” said WisdomTree in a recent research note.

In a rising rates environment, DGRW merits consideration because it features no exposure to rate-sensitive telecom and utilities stocks. Consumer staples, also seen as vulnerable to rising interest rates, are outweighed in DGRW by three other sectors. As recently as August, DGRW had a more than seven percent allocation to utilities stocks.

Although length of dividend increase streaks is not a primary factor in weighting DGRW's 280 components, a fair number of the ETF's top 50 holdings are also dividend aristocrats while plenty of others boast payout increase streaks of a decade or more.

“Our quality factor ranking is based on three-year historical averages for return on equity (ROE) and return on assets (ROA). We believe companies that generate greater profitability, controlling for any excessive use of leverage, should have a greater potential to increase their future dividends than firms demonstrating lower profitability metrics,” said WisdomTree.

Investors do not have to pay up to be involved with DGRW. The ETF's underlying index, the WisdomTree U.S. Quality Dividend Growth Index, trades at just under 18 times earnings. That is only slightly more than multiple on the S&P 500. The WisdomTree U.S. Quality Dividend Growth Index carries a dividend yield of 2.43 percent, according to issuer data. 

The other owns shares of DGRW.