A Dividend Alternative To Broad Market Exposure

Dividends play pivotal roles in a portfolio's long-term performance, but many investors often deploy dividend stocks or exchange traded funds alongside broad market exposures. When it comes to dividend ETFs, some may be suitable replacements for broad market funds, such as those tracking the S&P 500.

The WisdomTree U.S. Quality Dividend Growth Fund DGRW can be used as an alternative or complement to traditional large-cap funds. Home to $2.15 billion in assets under management, DGRW, which debuted nearly five years ago, has just over 280 holdings.

DGRW can also be used to complement high dividend strategies, and while the fund is more of a competitor to dividend growth ETFs, its methodology is significantly different than those employed by many of its most direct competitors.

Secret Sauce

Many old guard dividend ETFs either weight components by yield or search for companies with consistent track records of higher payouts by employing dividend increase streak requirements. DGRW takes a different approach, opting to focus on growth and quality factors. The strategy is working for DGRW investors.

The ETF's underlying index has a “21.3-percent return on equity, about 8 percentage points more than the S&P 500,” WisdomTree said in a Monday note. “Both the WisdomTree Index and the S&P 500 pay out a bit more than 40 percent of their earnings in dividends, retaining the rest. Investors have a choice with respect to the nearly 60 percent of earnings retained: own a collection of firms that redeploy capital at middling ROEs or own a different group at high ROEs.”

Historical data confirm DGRW's strategy works. Since inception, the ETF has outperformed the NASDAQ US Dividend Achievers Select Index, S&P High Yield Dividend Aristocrats and the S&P 500.

A Better Alternative

With the S&P 500 yielding around 1.9 percent and trading at more than 20 times earnings, the time could be right to consider DGRW.

Investors opting for the S&P 500 “will have stocks that pay a 1.89-percent dividend, trade for 20 times forward earnings and have an ROE of 13.8 percent,” said WisdomTree. “Or they can take the other path, which displays ROEs that are significantly higher than those of the S&P, with a lower P/E (18.9) and a higher dividend yield (2.19 percent).”

Six of DGRW's top 10 holdings are Dow components, including Exxon Mobil Corp. XOM, Johnson & Johnson JNJ and Apple Inc. AAPL. DGRW also pays a monthly dividend.

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Disclosure: The author owns shares of DGRW.