While dividends are a popular investment style and have been for decades, there’s still substantial criticism around payouts. However, today’s low interest rates and anemic bond returns remind investors that some exposure to dividend payers is advantageous.
Advisors can position for what’s expected to be a materially better environment for payout names with the Global Dividend Model Portfolio, which is part of WisdomTree’s Modern Alpha series of model portfolios.
“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 WisdomTree.
Today’s low-yield climate reminds advisors and investors that dividends matter.
“So, dividends matter to investors—perhaps now more than ever—even if purely academically speaking a dividend can be manufactured by selling shares,” writes WisdomTree analyst Matt Wagoner. “When looking at the long-term returns and volatility of dividend payers, it is also clear that an anomaly exists in the outperformance and lower volatility of higher dividend payers relative to companies that pay low or no dividends at all.”
Dividend Durability
WisdomTree’s model portfolio’s emphasis on dividend growers is particularly relevant in today’s market environment. Dividend-growing companies are also high quality names. Steady dividend payouts have additionally helped produce improved risked-adjusted returns over time.
“We are not implying that dividends are a free lunch. A dividend paid reduces a company’s cash balance and retained earnings from which future investments are funded,” notes Wagoner. “But what is clear is that over the long run, companies with high dividend yields have offered attractive risk-adjusted returns relative to the broader market, and today’s low-yield environment is creating even greater demand for dividend-focused investing.”
Investors should consider quality dividend growth stocks that typically exhibit stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders, and management team conviction in their businesses.
There are other reasons to consider this model portfolio today. Companies are feeling better about returning more of their capital to shareholders. S&P 500 dividends are expected to grow 3% in 2021 from 2020, according to FactSet. The payout ratio—the percent of earnings companies use to pay dividends — is expected to fall to about 35% from 42%, but the pure growth in dividend dollars still provides an attractive yield opportunity at current prices.
For more on how to implement model portfolios, visit our Model Portfolio Channel.
