The universe of dividend exchange traded funds is sizable and still growing. From the perspective of choice, that’s a positive, but locating the right payout funds to meet client needs can be a daunting task for advisors.
WisdomTree’s Global Dividend Model Portfolio eases that burden, and does so with a mix of the issuer’s and third party products, as well domestic and international fare. Dividend investing is a long-term pursuit, but the model portfolio is relevant here and now for multiple reasons, including revamped expectations for global dividend growth, low interest rates throughout much of the developed world, and inflation in the U.S.
Broadly speaking, dividend ETFs are compelling today, but the WisdomTree model portfolio’s bespoke approach is appealing too.
“Dividend-income funds can look appealing to those seeking a stable source of income. Done well, they can deliver on this objective. But there is some nuance to determining what constitutes a good dividend-income index strategy,” writes Morningstar analyst Daniel Sotiroff.
The Methodology Matters
Clients often assume that dividend stocks are also value names, and to some extent that’s true. That makes the model portfolio all the more pertinent today because many of its components, while possessing value traits, focus on quality.
That’s a worthy approach in the wake of last year’s rampant dividend cutting by financially flimsy companies and at a time when some market observers that the recent value rally is being propelled by lower quality companies. Those are reminders that for as enticing as dividend yield can be, payout growth is usually the way to go.
“Stocks with rising dividends are often backed by financially stable companies with strong sales and profit growth that support those higher cash distributions,” adds Sotiroff. “These profitable companies often trade at higher prices relative to their fundamentals, including dividends, and rarely if ever land in the higher-yielding segment of the market.”
The bulk of the WisdomTree model portfolio eschews weighting by yield – a strategy that can lead investors to companies most likely to cut or suspend payouts.
“Dividend-income funds that aggressively target high-yielding names are prone to overweight those with looming dividend cuts, further price declines, or both. Thus, they deserve a high level of scrutiny,” continues Sotiroff.
The model portfolio tilts away from such ETFs, opting to focus on funds that enhance clients’ odds of realizing steady, long-term dividend growth.
For more on how to implement model portfolios, visit our Model Portfolio Channel.