High interest rates have had the predictable effect of restraining the performances of dividend stocks and related ETFs. Over the past three years, some of the largest ETFs in the category deliver upside. But that’s nowhere close to the 30.8% gained by the S&P 500 over that span.
The WisdomTree U.S. Quality Dividend Growth Fund (DGRW ) has bested the S&P 500 by 730 basis points for the three years ending Aug. 29. That could be a sign that, should the Federal Reserve lower interest rates this month as expected, DGRW could be one of the dividend ETFs to reassert itself if dividend stocks benefit from lower borrowing costs.
While it’s typically high-dividend sectors such as real estate and utilities that derive the most benefit from lower interest rates, DGRW could be positively levered to monetary easing. That’s because technology — a rate-sensitive sector in its own right — is the ETF’s largest sector exposure, at 28.44%.
Renewed Dividend Enthusiasm Could Boost DGRW
It wasn’t just high interest rates that dampened investors’ enthusiasm for dividend stocks over the past several years. Mega-cap growth stocks, many of which are low-yield names or nondividend payers, lead domestic markets higher.
Fortunately, DGRW’s technology exposure allowed investors to participate in some of that upside while harnessing the benefits of steady dividends. Likewise, the WisdomTree ETF, due to its flexible indexing methodology, was quick to add new dividend payers from the growth space. Those include Alphabet (GOOG) and Meta Platforms (META ). Its technology and growth stock exposure is above average relative to other dividend ETFs. But that doesn’t diminish DGRW’s ability to participate in a potential resurgence by value stocks.
“Meanwhile, value stocks and high-quality companies with reliable balance sheets trading at lower multiples look much more interesting. Dividend stocks often overlap with this category. They tend to have reliable business models and cash flows that let them regularly return earnings to investors,” noted Sarah Hansen of Morningstar.
Dividend Yields More Attractive
Of course, lower interest rates would help dividend stocks, including those residing in DGRW. That’s because, as bond yields decline, stocks become more attractive, as they offer more upside potential than debt.
“Conventional wisdom says dividend investors should expect a boost as rates fall. Falling rates can push down bond yields, which can help make dividend yields more attractive in comparison,” added Hansen. “Rates aren’t expected to return to the rock-bottom levels common over the past few years. But some have argued that an overall environment of higher interest rates will also benefit dividend investors.”
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