By Jeremy Schwartz, Executive Vice President, Global Head of Research, WisdomTree
Increasing portfolio quality is a theme many investors flock to during recessions.
You might worry that rotation and flows to quality strategies push up valuations to premium prices, hurting the prospects of forward-looking returns. But WisdomTree has a potential solution. We have a family of quality dividend growth strategies that combine elements of screening for profitability (high return on equity (ROE) and return on assets (ROA)) and strong earnings growth expectations.
Because of the profitability focus and the dividend requirement, one of the interesting parts of our U.S. Quality Dividend Growth Fund (DGRW) is that it is trading at price-to-earnings (P/E) multiples that resemble the characteristics of “value” sides of the market, but with significantly higher quality ratios.
While the S&P 500 Value Index has a return on equity of 9.4%—below the S&P 500 level of 13.1%—DGRW has an ROE of more than 24%.
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For definitions of terms in the table, please visit our glossary.
Let’s look at some of the nuance of this strategy.
Dividends Under Pressure
The broad universe of value strategies and dividend-paying stocks has come under pressure in 2020 as many companies were forced to scale back or cut their dividends.
Less Likely to Cut Dividends: Whereas 272 companies, or 13%, of the 1,471 dividend payers in the WisdomTree U.S. Dividend Index either cut or suspended dividends in 2020, less than 8% of the 300 companies in the WisdomTree Quality Dividend Growth Index cut or suspended dividends in 2020.
Quality More Likely to Grow Dividends: Quality companies also tend to be able to grow dividends faster over time, and they were stress-tested during this pandemic. Whereas 54% of the broad universe of 1,471