DNL: Greater Dividends, Higher Growth, Attractive Valuations

DGRW tracks the WisdomTree U.S. Quality Dividend Growth Index and has an international counterpart that investors might want to consider: the WisdomTree Global ex-U.S. Dividend Growth Fund (DNL B-).

The $444.37 million DNL follows the WisdomTree Global ex-U.S. Quality Dividend Growth Index, which employs a similar methodology to DGRW’s underlying benchmark. In simple terns, DNL focuses on quality, return on assets, and return on equity (ROE) — traits DGRW investors are benefiting from. DNL’s index was rebalanced last month, and those alterations are worth examining today.

“After our rebalance, fundamentals show an increase in quality metrics, as well as higher implied growth, as measured by the earnings retention times ROE. ROA improves from 11.50% to 12.96% and the implied growth rate from 14.66% to 16.16%,” says Alejandro Saltiel, WisdomTree associate research director, in a note.

Obviously, DNL, which turned 15 years old in June, is an international exchange traded fund, making its country exposures highly relevant to investors. The ETF features allocations to 32 countries, both developed and emerging markets, but developing economies account for a significantly lower percentage of the fund’s weight than developed nations.

“During this latest reconstitution, Japan, Canada and India had notable reductions in their weights relative to the MSCI ACWI ex-U.S. Index. Exposures to the U.K., France and Germany were significantly increased,” adds Saltiel. “The largest change from a country perspective was France, whose weight increased by 6.18%. This increase was driven by the addition of Consumer Discretionary conglomerates LVMH Moet Hennessy Louis Vuitton SE and Kering SA. Both companies grew dividend payments in 2021 after the Covid-19 slowdown. The U.K. had the second-largest increase, largely attributed to the addition of companies from the Materials sector.”

Broadly speaking, those are notable country exposures increases because dividends are growing globally, not just in the U.S. In the case of the U.K., companies that were looking to reclaim dividend luster there lost because of the coronavirus pandemic. In Japan, the long-term runway for shareholder rewards is impressive because Japanese companies have plenty of cash and pristine balance sheets.

The U.K., France, and Japan combine for over 28% of DNL’s roster. At the sector level, DNL’s exposure to defensive consumer staples and healthcare stocks was pared, which could be beneficial from a valuation perspective because those groups are often pricey.

“When looking at sector changes, Consumer Discretionary had the biggest percentage-weight increase, driven by the previously mentioned French companies along with Spanish Industria de Diseno Textil, S.A. The Materials sector also saw a significant increase in weight driven by BHP Group Plc, Anglo American Plc and Vale S.A.,” notes Saltiel.

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