Dividend durability was certainly tested in 2020, but negative payout action earlier in the year helped investors identify cream of the crop dividend stocks.
Advisors can position for a payout growth resurgence in 2021 with WisdomTree’s Global Dividend Model Portfolio.
“This model portfolio seeks to provide capital appreciation and high current dividend income, through a globally diversified set of WisdomTree’s dividend income-oriented equity ETFs. The model strives to deliver dividend income in excess of the global benchmark of equities,” according to the issuer.
Making this model portfolio relevant for 2021 is its quality leanings, meaning many of its holdings aren’t dependent on risky yield-weighting.
“A high dividend yield can indicate the market has soured on a firm’s prospects and may be skeptical of its ability to continue to maintain its dividend at its current level,” notes Morningstar’s Ben Johnson. “Keying on dividend yield will lend a value orientation to a portfolio and may put investors at risk of catching a falling knife (or two).”
Seeking the Right Model Portfolio for 2021?
Companies are increasingly confident in growing dividends again, even as another surge in Covid-19 cases threatens earnings. According to FactSet estimates, S&P 500 per-share earnings are expected to bounce 22% in 2021—to above 2019 levels.
Making the aforementioned WisdomTree model portfolio all the more pertinent for 2021 is that many of its ETF holdings emphasize dividend growth, not yield.
“Investors often look at dividend yields in isolation, without giving dividend growth its due. Dividend growth is an important component of the overall income equation, as it will determine the extent to which the expansion of an investor’s equity-income stream will lag, keep pace with, or outstrip the rate of inflation,” says Johnson. “The goal, of course, is to grow this income stream at a rate that exceeds inflation, in order to grow one’s real (that is, inflation-adjusted) income.”
Stocks with steady payouts reassure investors of a company’s strong financial health. Additionally, dividend-paying stocks typically outperform those that do not pay over the long haul, with less volatility, due to the compounding effect of dividends on the investment’s overall return. Over the past 40 years, companies that boost payouts have proven to be less volatile than their counterparts that cut, suspend, or do not initiate or raise dividends.
Dividend growers “tend to be less cyclical and more profitable and have healthy balance sheets. In Morningstar parlance, they often have economic moats—durable competitive advantages—that allow them to earn juicy profits for extended periods,” adds Johnson.
For more on how to implement model portfolios, visit our Model Portfolio Channel.