Seeking Alpha
Dividend growth investing, retirement
Profile| Send Message|
( followers)  

Introduction

This is the third and last in a series of articles that look under the hoods of ETFs with "dividend" in their names. This time, I decided to focus on one fund company, WisdomTree, because my impression has been that they have been active in pursuing the income-seeking market with their growing menu of ETF offerings.

The ultimate goal of these articles is to discover if there is a dividend ETF that closely replicates the strategies, processes, and/or results of the many dividend growth investors who frequently write and comment here at Seeking Alpha. Earlier articles in the series are:

WisdomTree offers many dividend funds. I counted 20 ETFs that either have "dividend" in the name or that imply dividends by words such as "income" or by being in income-intensive sectors such as real estate or utilities. Here they are, categorized as WisdomTree presents them:

Domestic Dividend

  • WisdomTree Total Dividend Fund (NYSEARCA:DTD)
  • WisdomTree LargeCap Dividend Fund (NYSEARCA:DLN)
  • WisdomTree MidCap Dividend Fund (NYSEARCA:DON)
  • WisdomTree SmallCap Dividend Fund (NYSEARCA:DES)
  • WisdomTree Equity Income Fund (NYSEARCA:DHS)
  • WisdomTree Dividend ex-Financials Fund (NYSEARCA:DTN)

Global / Global ex-U.S.

  • WisdomTree Global Equity Income Fund (NYSEARCA:DEW)
  • WisdomTree Global ex-U.S. Utility Fund1 (NYSEARCA:DBU)
  • WisdomTree Global ex-U.S. Real Estate Fund1 (NYSEARCA:DRW)

Emerging / Frontier Markets

  • WisdomTree Emerging Markets Equity Income Fund (NYSEARCA:DEM)
  • WisdomTree Emerging Markets SmallCap Dividend Fund (NYSEARCA:DGS)
  • WisdomTree Middle East Dividend Fund (NASDAQ:GULF)

Developed World ex-U.S.

  • WisdomTree DEFA Equity Income Fund (NYSEARCA:DTH)
  • WisdomTree International LargeCap Dividend Fund (NYSEARCA:DOL)
  • WisdomTree International MidCap Dividend Fund (NYSEARCA:DIM)
  • WisdomTree International SmallCap Dividend Fund (NYSEARCA:DLS)
  • WisdomTree International Dividend ex-Financials Fund (NYSEARCA:DOO)
  • WisdomTree Europe SmallCap Dividend Fund (NYSEARCA:DFE)
  • WisdomTree Japan SmallCap Dividend Fund (NYSEARCA:DFJ)
  • WisdomTree Australia Dividend Fund1 (NYSEARCA:AUSE)

WisdomTree states that it does things differently. "We believe that active and passive investments are not mutually exclusive, so we developed products designed to offer elements of each." Jeremy Siegel, well-known to many dividend investors, is featured on their home page as "Senior Investment Strategy Advisor."

For this article, I chose to investigate three of the domestic dividend funds that I thought would come closest to the dividend growth strategy:

  • WisdomTree Total Dividend Fund
  • WisdomTree Equity Income Fund
  • WisdomTree Dividend ex-Financials Fund

I had high hopes for these funds, given the company's dividend focus and Siegel's involvement. I was quite disappointed.

WisdomTree Total Dividend Fund

Website: Click here to see the fund's own website.

Fund Family: WisdomTree

Year Introduced: 2006

Net Assets: $0.3 B

12-Month Yield: 2.7%

Morningstar Style: Large Value (category definitions)

Fund Summary:

Seeks investment results that closely correspond to the price and yield performance, before fees and expenses, of the WisdomTree Dividend Index. That index, in turn, is a "fundamentally-weighted" index that defines 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 established by WisdomTree. 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. The fund's correlation with the S&P 500 is 0.967, meaning that they move practically in lockstep with each other. Its beta since inception with the S&P 500 is 0.966.

Annual Expense Ratio: 0.28%

Total Stock Holdings: 1,276

Top 10 holdings (23.7% of total assets):

  • AT&T (NYSE:T)
  • Exxon Mobil (NYSE:XOM)
  • Microsoft (NASDAQ:MSFT)
  • General Electric (NYSE:GE)
  • Chevron (NYSE:CVX)
  • Pfizer (NYSE:PFE)
  • Johnson & Johnson (NYSE:JNJ)
  • Philip Morris (NYSE:PM)
  • Procter & Gamble (NYSE:PG)
  • Verizon (NYSE:V)

Total Performance:

  • 1-year: 9.3%
  • 3-year: 22.0%
  • 5-year: 0.52%
  • 10-year: NA

Distribution Performance:

2008: 1.6411

2009: 1.1403 (-31%)

2010: 1.3382 (+17%)

2011: 1.3799 (+3%)

DTD distributes four times per year. All distributions have been dividends (no capital gains or return-of-capital distributions). Distribution amounts vary by quarter, so no conclusions can be drawn by extrapolating a run-rate from a single distribution.

Yield on Cost Performance after 4 Years: Calculated by taking 2011's total distribution and dividing by 2008's opening price: 1.3799 / 56.75 = 2.4% for 2011. The approximate current run rate would be about 10% more than that, or 2.7%.

WisdomTree Equity Income Fund

Website: Click here to see the fund's own website.

Fund Family: WisdomTree

Year Introduced: 2006

Net Assets: $0.4 B

12-Month Yield: 3.4%

Morningstar Style: Large Value (category definitions)

Fund Summary:

Seeks investment results that closely correspond to the price and yield performance, before fees and expenses, of the WisdomTree Equity Income Index. That index, in turn, is a "fundamentally weighted" index that measures the performance of companies with high dividend yields selected from the WisdomTree Dividend Index. At the index measurement date, companies within the WisdomTree Dividend Index with market capitalizations of at least $200 million and average daily trading volumes of at least $200,000 for the prior three months are ranked by dividend yield. Securities ranking in the highest 30% by dividend yield are selected for inclusion. 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. The index has an S&P correlation of 0.857 and a beta of 1.02 (meaning it is slightly more volatile than the S&P 500, which is unusual for a dividend-focused portfolio).

Annual Expense Ratio: 0.38%

Total Stock Holdings: 345

Top 10 holdings (45.1% of total assets):

  • AT&T
  • General Electric
  • Pfizer
  • Johnson & Johnson
  • Philip Morris
  • Procter & Gamble
  • Verizon
  • Merck (NYSE:MRK)
  • Intel (NASDAQ:INTC)
  • Altria (NYSE:MO)

Total performance:

  • 1-year: 12.3%
  • 3-year: 24.4%
  • 5-year: (-1.5%)
  • 10-year: NA

Distribution performance:

2008: 2.1573

2009: 1.1804 (-45%)

2010: 1.5980 (+35%)

2011: 1.4171 (-11%)

SDY distributes four times per year. All distributions have been dividends (no capital gains distributions). Distribution amounts vary by quarter, so no conclusions can be drawn by extrapolating a run-rate from a single distribution. The reason for the drop in distributions in 2011 from 2010 is not known, but it is disturbing, as "no" dividend portfolios that I know of suffered such a drop in 2011. In general, dividends have been recovering since 2010.

Yield on Cost Performance after 4 Years: Calculated by taking 2011's total distribution and dividing by 2008's opening price: 1.4171 / 53.14 = 2.7% for 2011. The approximate current run rate would be about 10% more than that, or 2.9%.

WisdomTree Dividend ex-Financials Fund

Website: Click here to see the fund's own website.

Fund Family: WisdomTree

Year Introduced: 2006

Net Assets: $1.1 B

12-Month Yield: 3.1%

Morningstar Style: Large Value (category definitions).

Fund Summary:

Seeks investment results that closely correspond to the price and yield performance, before fees and expenses, of the WisdomTree Dividend ex-Financials Index. That index, in turn, measures the performance of high dividend-yielding stocks outside the financial sector. The index consists primarily of large- and mid-capitalization companies listed on major U.S. stock exchanges that pass WisdomTree requirements regarding market capitalization, liquidity and selection. I found no further detail on how stocks are "selected." The index has a 0.95 correlation and a beta of 0.77 compared with the S&P 500.

Annual Expense Ratio: 0.38%

Total Stock Holdings: 85

Top 10 holdings (20.5% of total assets):

  • Frontier Communications (NASDAQ:FTR)
  • Southern Copper (NYSE:SCCO)
  • Windstream (NASDAQ:WIN)
  • CenturyLink (NYSE:CTL)
  • Avon (NYSE:AVP)
  • AT&T
  • Altria
  • Lockheed Martin (NYSE:LMT)
  • Lorillard (NYSE:LO)
  • Verizon

Total performance:

  • 1-year: 9.7%
  • 3-year: 27.0%
  • 5-year: 1.4%
  • 10-year: NA

Distribution performance:

2008: 2.133

2009: 1.549 (-27%)

2010: 1.611 (+4%)

2011: 1.647 (+2%)

DTN distributes four times per year. All distributions have been dividends (no capital gains distributions). Distribution amounts vary by quarter, so no conclusions can be drawn by extrapolating a run-rate from a single distribution. 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 (NYSEARCA:SPY)) of -20%. This fund has not recovered its distributions as quickly as SPY either.

Yield on Cost Performance after 4 Years: Calculated by taking 2011's total distribution and dividing by 2008's opening price: 1.647 / 56.22 = 2.9% for 2011. The approximate current run rate would be about 10% more than that, or 3.2%.

Comments and Observations

After having examined 8 dividend ETFs in three articles, six individual stocks appeared in more than half of the top-ten lists:

  • AT&T (6)
  • Chevron (4)
  • Johnson & Johnson (4)
  • Pfizer (4)
  • Procter & Gamble (5)
  • Verizon (4)

For what it's worth, all six of these stocks were also in "The Most Common Stocks for Dividend Growth Investors." But think about stocks that aren't there that most dividend growth investors would probably think should be: Abbott; Coca-Cola; Kimberly-Clark; McDonald's; PepsiCo.

As stated in the last article, the 12-month dividend yields are surprisingly similar and surprisingly low, whether the ETF claims to be "high yield" or not. All the yields are between 2.0% and 3.4%. In fact, neither of the two highest yielders (VIG and DHS) claim to be "high yielding." All of the ETFs examined had dividend distribution drops in 2009, except for HDV, which wasn't around then. Maybe that shouldn't be a surprise, but DHS (examined in this article) also had a distribution drop in 2011, which seems inexplicable.

I was surprised by the relative lack of success of the three WisdomTree ETFs in attracting investors. Two have attracted less than $0.5B each, and the ex-financials fund has just $1.1B. They are far and away the smallest of the eight ETFs I investigated.

This will be the last article in the series. The research is drudgery, and I do not feel that I am going to find an ETF that replicates what individual growth investors commonly do, either in spirit, process, or results. Certainly none of the eight I examined comes close.

Few dividend growth portfolios that I have read about on Seeking Alpha have current yields under 3.5%, while all of the eight ETFs I looked at sport 12-month yields less than 3.5%. Many or most of the dividend growth portfolios from SA contributors or commenters did not suffer dividend declines in 2009, while all of the ETFs I looked at did. Among SA participants, 50-60 stocks is a large number to hold in such a portfolio; in the ETFs, it is a small number, and DTD in this article holds over 1,200 stocks, which did not seem to do it any good.

I come away from these articles with several distinct impressions:

  • I found no dividend ETF that could or should be used as a proxy for dividend growth investing when making comparisons to other stock investment strategies.
  • Individual, careful stock selection (including due diligence on company fundamentals) beats shotgun approaches based on dividend characteristics only.
  • Attentive management (buy and monitor) beats passive index-following.
  • The flexibility to react to events as they happen (such as dividend cuts) beats annual portfolio reconstitution.

Finally: The ETF companies don't "get it" about dividend growth investing. On the websites I examined, performance was presented primarily or exclusively in terms of total returns. While distributions were dutifully reported, none of them highlighted dividend returns or the growth in their distributions. None spoke at length about the pros and cons of dividend growth investing during your accumulation years nor during retirement.

Thank you for reading these articles. My mind is now at ease. I will continue to pursue stock-by-stock selection without wondering whether some dividend ETF is beating me to death.

Table of Commonly Held Stocks

Among the 8 funds examined, these are the stocks held in each fund's top ten holdings.

Fund

VIG

DVY

HDV

SDY

VYM

DTD

DHS

DTN

12-Month Yield

2.0%

3.4%

2.5%

2.0%

2.8%

2.7%

3.4%

3.1%

3M

X

Abbott

X

X

Altria

X

X

X

AT&T

X

X

X

X

X

X

Avon

X

CenturyLink

X

X

Chevron

X

X

X

X

Cincinnati Financial

X

Clorox

X

X

Coca-Cola

X

X

Con. Edison

X

Entergy

X

Exxon Mobil

X

X

X

Frontier Comm.

X

General Electric

X

X

X

HCP

X

IBM

X

Integrys

X

Intel

X

X

Johnson & Johnson

X

X

X

X

JPMorgan Chase

X

Kimberly-Clark

X

X

Leggett & Platt

X

Lockheed Martin

X

X

Lorillard

X

X

McDonald's

X

X

Merck

X

X

Microsoft

X

X

Old Republic

X

PepsiCo

X

Pfizer

X

X

X

X

Philip Morris

X

X

X

Pitney Bowes

X

PPG

X

Procter & Gamble

X

X

X

X

X

Southern Copper

X

United Technologies

X

Verizon

X

X

X

X

Wal-Mart

X

Windstream

X

Source: WisdomTree Dividend ETFs, Plus Overall Conclusions About Dividend ETFs