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Summary

  • Highlight of the WisdomTree U.S. Dividend Growth Fund.
  • How the WisdomTree offering stacks up against others in the field.
  • Indexing methodology explained.

By Todd Shriber & Tom Lydon

On Thursday, nearly 190 exchange traded funds hit all-time highs, more than 10% of which were dividend funds.

Among that group was the WisdomTree U.S. Dividend Growth Fund (NASDAQ:DGRW). The 13-month old DGRW reached its fresh all-time high on volume that was almost 36% above the daily average. Investors have taken notice of DGRW's success.

The fund crossed the $100 million in assets under management mark in March, and has since added another $16.3 million to its total.

Although there is no dearth of dividend ETFs, new and seasoned, on the market today, DGRW's lineup and index construction highlight a fund whose best days lie ahead.

On the surface, DGRW faces an uphill battle for investors' affections because of its low yield. The dividend yield on the WisdomTree U.S. Dividend Growth Index (WTDGI) is just 2.28%, or 30 basis points below where 10-year Treasury yields closed on Thursday. Then again, it is worth noting the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) is the largest U.S. dividend ETF, and that fund's dividend yield is in line with that of the S&P 500, at less than 2%.

One way to accurately view DGRW is that the ETF is a youthful spin on the tried-and-true concept of dividend growth. From 1972 through 2012, companies that initiated or consistently raised dividends outperformed, and were less volatile than the companies either did not pay, cut or kept dividends stagnant, according to Ned Davis Research.

For decades, investors hunting for dividend growth among stocks have often traversed the consumer staples, industrial and health sectors. DGRW is not light on those sectors, with an almost 45% combined weight to them, but DGRW's approach to dividend growth is new compared to older dividend ETFs, as highlighted by its 21.1% weight to the technology sector.

That tech exposure is high relative to dividend ETFs with longer track records, particularly those that encompass dividend increase streaks as part of their weighting methodology, something DGRW does not do.

Until recently, the tech sector has not been a prime dividend destination. That has changed, as the sector has been one of the largest contributors to S&P 500 since the financial crisis, but even tech dividend growth stalwarts such as Apple (NASDAQ:AAPL), Cisco (NASDAQ:CSCO) and Microsoft (NASDAQ:MSFT) do not have payout increase streaks long enough to qualify for entry into ETFs that mandate 10 years or more of boosted dividends.

Those three stocks, along with IBM (NYSE:IBM) and Qualcomm (NASDAQ:QCOM) combine for about 13% of DGRW's weight.

The average payout increase from Apple, IBM, Cisco and Qualcomm this year is almost 14%. That does not include an increase from Microsoft, DGRW's third-largest holding, which usually delivers in the second half of the year. Microsoft's last two dividend increases were 21.7% and 15%, respectively.

The average payout ratio among DGRW's top five holdings is 47%, a number skewed higher by Procter & Gamble's (NYSE:PG) 61.5% ratio. However, the cash on hand figures and low payout ratios of DGRW's largest tech holdings, combined with the fact that the ETF features no telecom or utilities exposure indicate the ETF's dividends should be safe and continue growing, even if interest rates rise.

WisdomTree U.S. Dividend Growth Fund Sector Weights

(click to enlarge)

Table Courtesy: WisdomTree

Todd Shriber owns shares of DGRW. Tom Lydon's clients own shares of Apple, Cisco and Microsoft.

Source: Dividend Growth ETF Grows Up