WisdomTree’s Quality Dividend Growth methodology puts an emphasis on the shifting trends in dividends and focuses on fundamental metrics that the company believes are associated with future dividend growth potential. These strategies use quality metrics focused on companies who are growing their dividends using the following criteria:
Growth: Long-Term Earnings Growth Expectations
Firms expected to grow their earnings faster, based on consensus analyst estimates, should have greater potential to increase future dividends.
The constituents selected by WisdomTree’s Quality Dividend Growth Indices exhibit consistently higher median dividend growth compared to market capitalisation-weighted benchmarks excluding Emerging Markets.
Quality: Combining Quality Factors to Target Earnings Inputs
Three-year average return of equity (ROE) and return on assets (ROA) figures are used to determine how efficiently firms are generating profits.Whilst ROE offers a means of gauging profitability, it can be inflated by leverage. ROA offers a means of mitigating overleverage, and combined with ROE, offers a way of screening for sustainable earnings.
Viktor Nossek, Director of Research at WisdomTree Europe said:
“Investors are keen to explore more developed methodologies to gain access to dividend-related strategies and at WisdomTree, we believe in the power of dividends to deliver the potential for enhanced risk-adjusted returns. In building these new proprietary strategies, we employ the same ’Buffett factors’ of return on equity (ROE) and return on assets (ROA) as a driving force for stock selection in our Quality Dividend Growth strategies, tilting towards quality companies with low debt and high return on equity.
Nizam Hamid, ETF Strategist at WisdomTree Europe added:
“The addition of these new ETFs – based on an evolving but proven investment strategy focused on quality dividends – means that we now offer UCITS ETFs that cover the full spectrum of dividend and income related investment themes. The WisdomTree Global Quality Dividend Growth UCITS ETF (GGRA) also represents our first global equity product to be launched on our UCITS platform. By creating innovative and transparent strategies we aim to bring to clients a breadth of dividend-oriented investment solutions that are critical in today’s low interest rate environment.”
The WisdomTree’s Quality Dividend Growth methodology places an emphasis on future dividend potential. Kenneth French and Eugene Fama’s, “A Five-Factor Asset Pricing Model”* academic paper showed that the highest quality basket of stocks in the US market outperformed by 1.5% per annum from 1963 to 2016, leading to double the market’s return. Research by MSCI for the Norwegian Ministry of Finance** also highlighted the benefits of focusing on income and dividends with 78.6% of equity returns over the past 10 years coming from a combination of dividend growth and dividend yield, rising to 93% over 20 years. Warren Buffet has also espoused quality traits in his long run approach to investing.