In an article published in April 2012, I examined three WisdomTree dividend ETFs. WisdomTree recently introduced two new dividend ETFs, so it is a good time to look at them plus revisit the older ones.
WisdomTree has devoted a good deal of attention to dividend ETFs. Jeremy Siegel, well-known to many dividend investors, was and still is featured on WisdomTree's home page as "Senior Investment Strategy Advisor."
This year I counted 24 funds (up from 20 last year) that have either "dividend" or "equity income" in their names, or are in income-intensive sectors such as real estate or utilities.
These are the two new dividend funds that I will examine here:
In addition, I will revisit these three WisdomTree funds that I reported on last year:
Two New Dividend Funds from WisdomTree
WisdomTree U.S. Dividend Growth Fund
Date Introduced: May 22, 2013
Net Assets: $44.4 Million
12-Month Yield: NA. SEC 30-day yield = 2.01%
Morningstar Style: Large Growth (category definitions)
Like all the WisdomTree funds that I have seen, DGRW is based on an underlying index. The index is created separately, and then the fund attempts to track it.
DGRW's underlying index is the WisdomTree U.S. Dividend Growth Index. This is a fundamentally weighted index that consists of dividend-paying U.S. common stocks with growth characteristics. It contains 300 companies with the "best combined rank of growth and quality factors," specifically (1) long-term earnings growth expectations, (2) return on equity, and (3) return on assets. All stocks have market caps of at least $2 billion. Companies projected to pay more dividends are more heavily weighted. The index is reconstituted ("rebalanced") once per year, and at that time, the maximum weight of any security is capped at 5% and sectors are capped at 20%.
The fund's marketing materials stress technology as a growth area, and in fact 20% of the fund's holdings are from the Information Technology GICS sector, which is a high allocation from the usual dividend growth investor's perspective. The following comes from the fund's marketing materials:
In the current fast-paced environment, large technology companies can often lead the way, creating the products and services we desire today - and will rely on tomorrow. In recent years, these large companies have also been leading the way in dividend growth, introducing dividends or increasing them faster than other sectors. But if your dividend fund uses a backward-looking growth screen, chances are you won't be able to take advantage of these dividend growth trends for 5, 10 or even 20 years.
Now, for the first time, WisdomTree brings you a forward-looking dividend growth exchange-traded Fund that seeks to help you capture these dividend growth trends. DGRW, the WisdomTree U.S. Dividend Growth Fund, looks at certain fundamental metrics that we believe to be associated with a greater potential for future dividend growth, thereby raising the probability of generating exposure to some of the strongest potential dividend growers….
Today, the most widely followed indexes that focus on dividend growth (and, as a result the ETFs tracking their performance) employ backward-looking growth screens that require a company to have paid - and in some cases raised - dividends for 5, 10 or even 20 years before becoming eligible for inclusion. This may seem like a smart idea, but it keeps many investors from capitalizing on the shifting trends in the dividend landscape, specifically when it comes to newer payers and firms recovering from recent dividend contractions….
The Index that DGRW is designed to track applies a few selection criteria in order to potentially raise the probability of generating exposure to future dividend growers. While no index methodology would ever be able to look into the future with certainty, we believe there is both logical and economic backing to the set of factors we have selected….
Dividends have become well known for coming from "defensive sectors" (Consumer Staples, Health Care, Utilities and Telecommunications Services). Utilities in particular are known for historically having high trailing 12-month dividend yields, while Technology tends to be under-weight in many dividend-focused strategies. As discussed earlier, the Information Technology sector is driving the bulk of today's dividend growth. While this may not always be the case, we believe that DGRW's forward-looking strategy may provide investors with the potential to capitalize on the industries and companies growing their dividends the fastest today and tomorrow.
WisdomTree uses the following table to illustrate its point:
WisdomTree points to Apple (AAPL) as an example of what they are trying to accomplish:
Consider that Apple is now the largest dividend payer in the United States and responsible for a large share of growth in dividends over the past five years. But indexes that employ historical dividend screens, such as the Dow Jones U.S. Select Dividend Index, the NASDAQ US Dividend Achievers Select Index and the S&P High Yield Dividend Aristocrats Index, won't be able to include Apple until 2017, 2023 or 2033, respectively. In fact, these indexes currently exclude many of today's 20 largest dividend payers.
However, Apple and many other dividend leaders are already eligible for inclusion in DGRW.
In terms of sector weighting, in addition to the 20% in Info Tech, another 20% is in the Industrials sector, 20% is in Consumer Discretionary, and 19% is in Consumer Staples.
Annual Expense Ratio: 0.28%. Note that trading expenses are not included in this expense ratio and will reduce the returns of the ETF accordingly.
Total Stock Holdings: 300
Top 10 holdings (30.0% of total assets):
- Microsoft (MSFT)
- Procter & Gamble (PG)
- Wal-Mart (WMT)
- Coca-Cola (KO)
- McDonald's (MCD)
- Home Depot (HD)
- Intel (INTC)
- Altria (MO)
- PepsiCo (PEP)
- 1-year, 3-year, 5-year, 10-year: NA
- Since inception: +1.6%
DRGW distributes monthly. It has made just two monthly distributions since inception (both in the amount of $0.038), so it is too soon to assess its distribution performance or growth. I do not know whether the two identical distributions indicate an intent to smooth distributions over time. Other WisdomTree funds with historical quarterly distributions have been uneven, making it difficult to forecast an annual amount from a single payment.
For reasons that are not clear to me, the fund labels the distributions as "ordinary income" rather than dividends. I do not know whether this has tax implications. In the Summary Prospectus, it says this: "The Fund intends to make distributions that may be taxed as ordinary income, qualified dividend income, or capital gains." Neither of the two distributions has distributed any capital gains.
Yield on Cost Performance: NA. If the fund delivers on its promise to hold companies that grow its dividends faster than average, this will become an important metric over time. Right now, after just two months, it is too soon to tell. It seems that DGRW's dividend growth will be very important given the fund's initial yield of around 2%, which is no better than the S&P 500's yield.
WisdomTree U.S. SmallCap Dividend Growth
Date Introduced: July 25, 2013
Net Assets: $7.7 Million
12-Month Yield: NA. SEC 30-day yield is also NA.
Morningstar Style: Small Core (category definitions)
Jeremy Schwartz, WisdomTree Director of Research, said the following in a press release:
WisdomTree's family of dividend growth ETFs offer a unique, forward-looking dividend growth methodology. A number of dividend growth indexes focus on backward-looking dividend-screening criteria that we believe exclude many dividend initiators and fast-growers that are often found in the small-cap arena. DGRS is the first, and only, strategy focusing on the U.S. market's small-cap dividend growth leaders, a segment we believe offers some of the most attractive dividend growth opportunities.
Many assume that high quality, dividend growth opportunities are confined to blue chip, large-cap stocks. But in an environment where the U.S. economy is improving and interest rates are beginning to rise, small caps, more closely tied to the U.S. economy, will likely become more attractive than large caps, which are more globally sensitive.
According to its marketing materials, DGRS seeks to offer:
• A diversified basket of small-cap dividend-paying securities with growth characteristics
• Differentiated exposure from traditional dividend funds
• Greater exposure to cyclical sectors leveraged to an improving U.S. economy versus more defensive sectors
The underlying index for DGRS is the WisdomTree U.S. SmallCap Dividend Growth Index. The starting screening universe for that index is the WisdomTree SmallCap Dividend Index, which consists of the bottom 25% of the market capitalization of the WisdomTree Dividend Index after the 300 largest companies have been removed. As of June 30, 2013, the index had a market cap range from $107 million to $2.66 billion.
Eligibility requirements for inclusion in the Index include regular payment of cash dividends on in the annual year prior to the annual index rebalance, market capitalization of at least $100 million, and minimum daily trading volume requirements. From the starting universe, the index selects the top 50% of companies with the best combined rank of certain growth and quality factors, specifically long-term earnings growth expectations, return on equity, and return on assets.
Securities are weighted by the coming year's projected dividends, based on the most recently declared dividend per share. Companies projected to pay more dividends are more heavily weighted.
The index is rebalanced annually. Caps on stock and sector weights are 2% and 20%, respectively. Sectors representing more than 10% of the fund are:
- Industrials 25%
- Consumer Discretionary 24%
- Materials 14%
- Information Technology 13%
- Health Care 10%
Annual Expense Ratio: 0.38%. Transaction costs are not reflected in the expense ratio and may affect overall performance. Since the fund is new, no turnover data is yet available.
Total Stock Holdings: 169
Top 10 holdings (22.2% of total assets):
- Questor Pharmaceuticals (QST)
- Adtran (ADTN)
- Con-Way (CNW)
- Meredith (MDR)
- Janus Capital (JNS)
- Geo Group (GEO)
- Evercore Partners (EVR)
- Heartland Payment Systems (HPY)
- Carbo Ceramics (CRR)
- Cooper Tire & Rubber (CTB)
- 1-year, 3-year, 5-year, 10-year: NA
- Since inception: +1.1%
DGRS has made no distributions yet. It is scheduled for monthly distributions, the first of which will be on August 30.
Yield on Cost Performance after 4 Years: NA.
WisdomTree Funds Examined Earlier
Following are supplemental reports to the ones I made last year. These three funds are more established with longer track records. Please refer to my earlier article for more in-depth analysis of these three ETFs.
WisdomTree Total Dividend Fund
A few things have changed at this fund. (Click here to see the fund's website.) It was introduced on June 16, 2006, and its assets are up to about $359 Million. It is large-cap and value oriented, as shown by this Morningstar graphic:
DTD's underlying index is the Wisdom Tree Dividend Index. That index is a "fundamentally-weighted" index that covers the dividend-paying portion of the U.S. stock market. It measures the performance of US companies that pay regular cash dividends and that meet other liquidity and capitalization requirements.
The index is "dividend weighted" at the annual reconstitution in December to reflect the proportionate share of the aggregate cash dividends that each component company is projected to pay in the coming year, based on the most recently declared dividend per share.
When I reported last year, DTD's beta since inception with the S&P 500 was 0.966, meaning that they moved practically in lockstep. As shown in the following diagram, DTD's price performance has fallen a bit behind the S&P 500 (as represented by SPY) in recent months.
DTD's expense ratio is still 0.28%, and the total number of stocks held has dropped from 1,276 to 928. Its top 10 holdings are practically unchanged, but Apple knocked Philip Morris out of the top ten and a couple of stocks exchanged places. These stocks represent 22.6% of the fund's total holdings.
- Exxon Mobil (XOM)
- AT&T (T)
- Microsoft (MSFT)
- Johnson & Johnson (JNJ)
- General Electric (GE)
- Chevron (CVX)
- Pfizer (PFE)
- Procter & Gamble (PG)
- Verizon (V)
Perhaps the most notable change is that DTD has increased the frequency of its distributions. From inception and through the time of last year's article, DTD distributed four times per year. But a 5th distribution was made in December 2012, and per WisdomTree's distribution schedule, DTD is now on a monthly distribution schedule. All distributions have been income (no capital gains or return of capital). Again, puzzlingly, WisdomTree labels these distributions as "ordinary income." Here are the total annual distributions since 2008:
2009: 1.1403 (-31%)
2010: 1.3382 (+17%)
2011: 1.3799 (+3%)
2012: 1.6519 (+20%)
I calculate DTD's 5-year yield on cost by taking 2012's total distribution and dividing by 2008's opening price: 1.6519 / 56.75 = 2.9% for 2012. That would strike most dividend growth investors as very weak income growth performance after 5 years. It was hurt, obviously, by the 31% drop in income in 2009. In fact, 2008's income amount was just finally re-attained in 2012. 2011's increase was also oddly low at 3%.
WisdomTree Equity Income Fund
This fund's assets have almost doubled since last year's report, now standing at more than $749 million. (Click here to see the fund's website.) Its SEC 30-day yield stands at just under 3.5%, about the same as last year. This is a Large Value fund by Morningstar's definitions:
DHS's underlying index is the WisdomTree Income Index, which is a "fundamentally weighted" index that measures the performance of companies with high dividend yields selected from the WisdomTree Dividend Index. The index selects the highest-yielding 30% of stocks from the Dividend Index. There are also size and liquidity requirements. The index is dividend weighted annually to reflect the proportionate share of the aggregate cash dividends that each component company is projected to pay in the coming year, based on the most recently declared dividend per share.
As you can see in the following chart, DHS has badly underperformed the S&P 500 (proxy SPY) in price returns over the last several years.
The fund's annual expense ratio has remained the same at 0.38%. Total number of stocks in the fund has remained about the same at 350. Here are the top 10 holdings, which comprise 42.4% of the total fund:
- Johnson & Johnson
- Procter & Gamble
- Philip Morris
- Merck (MRK)
- Intel (INTC)
There are several changes in the top 10 from last year: Microsoft and Chevron are in, GE and Altria are out. Also several stocks moved up or down by a position or two.
These are DHS's distributions for the past 5 full years:
2009: 1.1804 (-45%)
2010: 1.5980 (+35%)
2011: 1.4171 (-11%)
2012: 1.8390 (+30%)
In mid-2012, DHS moved to monthly distributions from quarterly. Calculating the 5-year yield on cost by dividing 2012's total distribution by 2008's opening price indicates 1.8390 / 53.14 = 3.5%. After five years, that is not very good for a fund whose current yield is in the same range.
Note that DHS suffered a huge 45% drop in distributions in 2009, then also backtracked 11% more in 2011. These are disturbing results. The drop in 2009 is perhaps explainable, but its magnitude is hard to understand. The 2011 drop seems inexplicable. SPY's distributions increased 14% in 2011, and in general dividends have been recovering since 2010. The following chart from Morningstar illustrates the up-and-down nature of DHS's distributions. This is not the sort of SWAN income performance that comforts the average dividend growth investor.
WisdomTree Dividend ex-Financials Fund
This fund's assets have increased just a little since last year's article, to about $1.2 billion. (Click here to see the fund's website.) Like the other two funds just discussed, it was started in 2006. Its SEC 30-day yield is 3.1%.
DTN's Morningstar style is Large Value:
DTN's underlying index is the WisdomTree Dividend ex-Financials Index. That index measures the performance of high-yielding stocks outside the financial sector. The index is comprised of the 10 highest dividend-paying companies in each sector, selected from the 300 largest companies by market value in the WisdomTree Dividend Index. Financial companies are excluded. As with the other funds, there are requirements regarding market capitalization and liquidity. The fund's expense ratio has remained the same at 0.38%.
There are 85 holdings in the index. That number is unchanged from last year's report, but the top 10 holdings have changed significantly. Here are the top 10, which comprise 17.8% of the fund:
- Hewlett-Packard (HPQ) *
- Exelon (EXC) *
- Lockheed Martin (LMT)
- Reynolds American (RAI) *
- CenturyLink (CTL)
- Ameren (AEE) *
- CA (CA) *
- Microchip Technology (MCHP) *
- Lorillard (LO)
As you can see from the following chart, DTN's price changes have tended to track SPY's pretty closely.
Here are the fund's distributions for the past 5 years.
2009: 1.549 (-27%)
2010: 1.611 (+4%)
2011: 1.647 (+2%)
2012: 2.4179 (+47%)
The huge leap in 2012 brought DTN's distributions back above 2008's level after the drop in 2009 and paltry increases in 2010-11. Since this ETF excludes financials, I was surprised to see the 27% drop in dividend distributions in 2009. That was more than the S&P 500's drop (proxy (SPY)) of -20%. DTN switched to monthly distributions in the middle of last year. The 5-year yield on cost at the end of 2012, calculated as for the other funds, was 4.3%.
Comments and Observations
WisdomTree's dividend funds are characterized by relatively low yields and inconsistent dividend growth histories that fall short of what many dividend growth investors achieve on their own.
Despite Professor Siegel's involvement, a deep bench of financial engineers, and plentiful resources for development and marketing, WisdomTree's offerings do not seem to accomplish what individual dividend growth investors routinely achieve.
- Few dividend growth portfolios that I have read about on Seeking Alpha have current yields under about 3.8%, while all of the ETFs reported here have lower yields. Many or most of the dividend growth portfolios described in SA articles and comments did not suffer dividend declines in 2009, while each of the older ETFs discussed here did. DHS's 11% decline in 2011 is inexplicable (and nothing in WisdomTree's materials attempts to explain it). In fact all of the funds' weak distribution growth in 2011 is hard to understand.
- The mechanical rules for selecting stocks don't seem to select the best ones (judging by performance). I remain convinced that careful stock-by-stock selection (including due diligence on company fundamentals) beats shotgun approaches based on dividend characteristics only.
- Fees eat up performance. If you have a fund with a gross 3.0% yield, it becomes 2.62% after subtracting a fee of 0.38%. That is a 13% reduction in your income. Every year. (All the funds I have looked at deduct their fees from their distributions.)
- Annual reconstitution of a portfolio is not a best practice for dividend growth investors who buy and monitor their portfolios. Attentive management beats passive index-following. The flexibility to react to events as they happen (such as dividend cuts) beats annual portfolio reconstitution.
For a company that is actively developing and marketing dividend ETFs, WisdomTree's marketing materials contain surprisingly little information about the pros and cons of dividend investing itself. The websites and PDFs available for each fund do not present simple displays illustrating income, income growth, or dividends' contribution to total returns. While distributions are dutifully listed and the statutorily required yields are displayed, none of the materials highlight dividend returns nor the past or potential future growth in the funds' distributions. No mention is made of the impact on results of reinvesting dividends. All of these subjects are important to dividend investors.