By Jeremy Schwartz, CFA, WisdomTree Director of Research
Key Features of Dividend Stream Growth in 2011
With two consecutive years of double-digit dividend growth in 2010 and 2011, the U.S. Indicated Dividend Stream of the WisdomTree Dividend Index is within 2% of surpassing its all time high set in November 2007. With almost $284 billion in Indicated Dividends1 at the November 2011 screening date, the dividend stream only needs to grow by another $5 billion to erase the nearly $70 billion decline in dividends that occurred largely as a result of the 2008-09 financial crisis.
In terms of specific companies, all 20 of the 20 largest dividend payers raised their dividends per share in the preceding year leading to an average year over year growth rate of over 30% for these companies. The total dollar value increase in dividends was 14.6%. This is significant, as it shows it was not just a few companies that grew their dividends, but in fact the growth was widespread. These top 20 dividend paying firms can actually finance their dividends directly from earnings. All 20 show dividend coverage ratios greater than 1.0x, and they have an average dividend coverage ratio of about 2.7x, indicating that cash on balance sheets can potentially be increased AND shareholders can receive greater dividends. Detailed information on the WisdomTree Dividend Stream is available by clicking here.
One of the most informative aspects of WisdomTree's Dividend Index screening and rebalance methodology regards industry sector performance-specifically how a sector's price performance relates to its dividend growth. Financials, unsurprisingly, saw the worst price performance as of the re-balance date (November 30, 2011) but they also saw the highest annual dividend growth-37.2%. Other sectors that were able to grow dividends more than 20% included Information Technology and Materials.
Utilities (+16.00%), Consumer Staples (+10.93%), and Healthcare (+9.54%) were the top performing sectors in the WisdomTree Dividend Index in 2011 as of our re-balance date (11/30/2011), which also is not surprising with volatility and negative sentiment leading investors toward these historically defensive sectors. Healthcare delivered dividend growth of 13.5% from 11/30/2010-11/30/2011, but Utilities had dividend growth of just 4.4% and Consumer Staples had dividend growth under 10%. A relative value that evaluates stock price performance versus dividend growth would look to take profits from these better-performing sectors and reposition towards sectors like Materials or Information Technology or even financials. This is the approach WisdomTree's dividend indexes take, as it reduced weight in those sectors that out-performed their dividend growth and added weight to companies that under-performed their dividend growth.
U.S. Equity Performance In 2011
Interestingly, the S&P 500 Index as of year end was still over 300 points - approximately 25% - off of its all-time highs, observed in October of 2007. It delivered zero returns on a price appreciation basis in 2011 and all its returns came from dividends in 2011 (+2.1%). The yearend price change of zero masks the high levels of volatility experienced by investors over this period of time. The S&P 500 Index is market cap-weighted, while the WisdomTree Dividend Index is dividend stream-weighted, so therefore the methodologies of these indexes are quite different.
However, the point is not to compare the price performance of the two indexes or even the dividend stream performance of the two indexes. The key point that we see is that, after all that has occurred in the markets since the 2008-09 financial crisis, dividends in the WisdomTree Dividend Index universe have largely recovered and we think that this indicates companies may be in better shape than price levels of the S&P Index more than 25% below their peak might suggest.
While much focus remains on potentially negative market influences, we want to emphasize that the 2011 dividend stream of the WisdomTree Dividend Index has delivered strong growth. In fact, if we exclude firms in the Financials sector, it is actually nearly 24% higher than it was at its prior peak on 11/30/2007.
Past performance is not indicative of future results.
WisdomTree Funds are distributed by ALPS Distributors, Inc.
Jeremy Schwartz is a registered representative of ALPS Distributors, Inc.
 The U.S. dividend stream, also referred to as the indicated dividend stream, is the aggregate cash dividends each component company of the WisdomTree Dividend Index has indicated to pay in the coming year, based on the most recently declared dividend per share.
 The WisdomTree Dividend Index measures the performance of U.S. companies, listed on the NYSE, AMEX, or NASDAQ Global Market, that pay regular cash dividends and that meet other liquidity and capitalization requirements established by WisdomTree. The Index is dividend-weighted.
 WisdomTree, Bloomberg
 Dividends per share growth rate: 2011 indicated dividends per share divided by 2010 indicated dividends per share, minus 1, and then averaged across all 20 firms.
 Dividend coverage ratio: Amount of earnings generated in excess of $1 in dividends paid
 S&P 500 Index: Market capitalization-weighted benchmark of 500 stocks selected by the Standard and Poor's Index Committee designed to represent the performance of the leading industries in the United States economy.
 WisdomTree, Bloomberg