Two Avenues To Shareholder Rewards With This ETF

There is consistent debate about whether dividends or share buybacks are better for investors over the long haul and there are plenty of exchange-traded funds that accommodate investors on both sides of this debate.

Obviously, there are dedicated dividend ETFs and there are several ETFs that, in some form or fashion, use buybacks as the cornerstones of their weighting methodology. What some investors may not realize is that one ETF, if it is the right ETF can give investors exposure to both avenues of shareholder rewards. Not surprisingly these ETFs emphasize quality.

The WisdomTree U.S. Quality Dividend Growth Fund (WisdomTree Trust DGRW) is one such ETF. As its name implies, DGRW is a dividend ETF, but its application of quality turns up plenty of cash-rich companies in in its lineup, meaning DGRW's roster is home to dividend payers, some of which are also the largest repurchasers of their own shares.

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Dividend Yield

The S&P 500s “current dividend yield of 2.22 percent could imply that the market is ‘expensive’ because it is below the average 4.4 percent dividend yield of the markets since 1871. This might be the case if firms were not altering the way they return money to shareholders (i.e., through increased buybacks).

“So looking at the combined dividend yield and net buyback ratio, or shareholder yield, being north of the long-term historical average might tell a different story about valuations. Also, assuming a constant level of cash flows in the future, this recent buyback surge could potentially lead to higher per-share earnings and dividend growth,” said WisdomTree in a recent note.

Bolstering the allure of DGRW is its combined emphasis on return on assets and return on equity, two metrics which help identify companies that can pay and grow dividends while being buyers of their own stock. Just look at some of DGRW's nearly 300 holdings. As just two examples, Apple Inc. AAPL and Microsoft Corporation MSFT have delivered stellar dividend growth in recent years, but the pair are also two of the largest buyers of their own shares in corporate America.

Buyback Allure

DGRW's underlying index has a dividend yield of 2.46 percent, but factor in a buyback ratio of 3.56 percent, and the ETF's shareholder yield jumps to just over 6 percent, according to issuer data.

“Looking at the history of the S&P 500 Index over the last 15 years, increasingly firms have been using share buybacks as a method for returning cash to shareholders. As of December 31, 1999, dividends and share buybacks were roughly equal, at around $140 billion each. But as of September 30, 2015, firms distributed to shareholders $559 billion of share buybacks and $376 billion of dividends over the previous 12 months. We find it impressive that total buybacks were about 50 percent more than dividends,” added WisdomTree.

DGRW allocates nearly 40 percent of its combined weight to the consumer discretionary and technology sectors. That is above average relative to other dividend ETFs, but that overweight also indicates DGRW is capturing sector that have recently been and can continue to be sources of significant payout growth.

Disclosure: Todd Shriber owns shares of DGRW.

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