Differences Make All The Difference For This Dividend ETF

Investors experienced in dividend exchange-traded funds probably know at least two things. First, many dividend ETFs use dividend increase streaks as a centerpiece of their weighting methodology. Second, if a dividend ETF is not married to that methodology, there is a reasonable chance its portfolio is weighted by yield.

However, seasoned dividend investors also know that dividend increase streaks, while nice, do not guarantee more of the same in the future. These investors also know that yields rise when a stock's price declines and market history is littered with instances of companies with high dividend yields proving to investors those yields are unsustainable by way of dividend cuts or suspensions.

So, while high yields and long payout increase streaks are seductive, they are not necessarily the best ways to build a dividend ETF. Some ETFs that adhere to different methodologies are finding success, including the WisdomTree U.S. Quality Dividend Growth Fund (WisdomTree Trust DGRW). DGRW, which turns three later this month, has nearly $600 million in assets under management.

The Index And Recent Performance

DGRW follows the WisdomTree U.S. Quality Dividend Growth Index (WTDGI). Herd mentality has rarely proven efficacious over the course of investing history. Perhaps that is why DGRW has proven successful in its three years since inception.

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“WTDGI’s forward-looking methodology and quality bias have resulted in the Index being over-weight the Information Technology sector compared to indexes reliant on backward-looking dividend growth trends. This over-weight has added to its relative performance since inception, which makes sense to us, because the sector is also a dividend growth leader. To look at Apple again: after reinstating dividend payments back in 2012, the company has grown its dividend by 50% on a cumulative basis, or over 11 percent on an average annual basis. Yet a 10-year backward-looking dividend growth methodology would exclude Apple until at least 2022,” said WisdomTree in a recent note.

Translation: DGRW's 18.6 percent weight to technology stocks is large relative to other dividend ETFs, as is the fund's 2.8 percent weight to Apple Inc. AAPL. In recent years, technology has become a legitimate dividend destination, and Apple has been a big driver of that trend. DGRW captures that theme, while many rival dividend ETFs do not.

DGRW's Other Allocations

DGRW also features scant allocation to traditionally high-yielding sectors. For example, the ETF features no exposure to telecom and utilities stocks. Energy, the sector that has accounted for the bulk of negative dividend action in the S&P 500 over the past year, also is not represented in DGRW.

“We believe that backward-looking strategies can keep the companies growing their dividends the fastest out of a portfolio,” added WisdomTree. “While no approach can predict which firms will increase future dividends, we believe that being broad, flexible and forward-looking will enable WTDGI to more quickly respond to – and better capitalize on – the changing U.S. dividend landscape. In turn, we believe this methodology will track the performance of the companies growing their dividends the fastest today—and tomorrow. Another important metric we feel can be an indication for longer-run real returns is considering dividends and share buybacks together, and WTDGI is one of our most attractive Indexes on that measure.”

Disclosure: Todd Shriber own shares of DGRW.