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%.

Refreshing Valuations 1

Please click here for standardized and the most recent month-end performance.

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

We last wrote about Target (TGT) in May, citing considerable upside potential – since then shares have run up over 30%. Our thesis was primarily built on an unjustified discount being applied by the market due to temporary margin headwinds. We continue to believe that Target is a quality brick-and-mortar retailer and although valuation has run up in the past several months, we believe this is also justified given their recent Q2 results.

You can get 10% off a Target gift card this Sunday | News Headlines | kmov.com

Source

We reiterate our buy rating on Target, and continue to believe long-term performance will remain fairly stable warranting a premium in the current environment. Recent quarterly results reinforce this.

Retail Performance is Widespread

Target operates as a brick-and-mortar retailer selling a wide variety of merchandise. Other companies selling general merchandise include superstores like Walmart (WMT) and Costco (COST). Retail has experienced heavy impacts as COVID-19 swept the country – many department stores were forced into bankruptcy while grocery stores saw temporary tailwinds. Going forward, we believe the industry’s performance will be category-dependent.

Source: PlacerAI

Declining foot traffic continues to be the case at department stores, and we don’t expect that to change all that much. On the other hand, there has been fairly stable – if not positive – year-on-year performance at specialty retailers in the home improvement and grocery space. Placer.ai presents an interesting picture of retail performance throughout the pandemic, by category.

Adding on to the stable brick-and-mortar business, Target is also benefiting from efforts on the e-commerce front. With initiative like Buy Online, Pick-up in Store (BOPIS) and delivery through platforms like Shipt, they are able to service demand more efficiently than before. We believe this will be critical going forward and can help Target maintain their position, or even ramp up share.

Target Continues to Perform

Quarterly revenues have been growing in