The WisdomTree U.S. Total Dividend Fund (DTD ) isn’t a high-dividend exchange traded fund in the most classical sense of the term, but DTD’s distribution yield of 4.21% is attractive relative to the broader equity market and U.S. government bonds.
Some investors may interpret that as a sign that the WisdomTree ETF could be vulnerable as the Federal Reserve sets out on its interest rate-tightening course. After all, some of the highest-yielding sectors, such as real estate and utilities, have bond-like prospects, potentially making those groups unattractive as rates rise.
For investors considering the $1.01 billion DTD, the good news is twofold. First, DTD isn’t heavily allocated to the sectors with track records of being inversely correlated to rates. Second, some market observers argue that the bond/high-dividend link is easing, and that could be a plus for this ETF as rates rise later this year.
“Crucially, high yielding equities no longer trade like bond proxies, as in the past, and now exhibit positive correlations with changes in bond yields. This is important as it means that high equity dividend yield stocks can outperform, even as bond yields rise. So far this year, like the wider value trade, high dividend yield stocks have outperformed,” writes Bernstein strategist Mark Diver in a Monday note to clients.
Investors considering DTD should also reconsider what constitutes a high-yield sector because that label isn’t limited to real estate and utilities. Rather, it includes some groups with interest rate durability and inflation-fighting capabilities.
“In recent years value stocks and high yielding stocks have tended to be dominated by Financials and other cyclically sensitive sectors such as Energy and Materials. … These sectors are particularly well positioned to profit from the uptick in economic growth as the pandemic recovery continues,” adds Bernstein’s Diver.
Financial services — the sector most positively correlated to higher interest rates — is DTD’s largest sector exposure at 16.69%. Energy and materials stocks combine for over 10% of the fund’s weight.
Adding to the case for DTD is that even with 10-year Treasury yields trading higher over the past month, those yields reside at 1.7350% as of January 24. The longer those yields remain below 2%, the less of a threat government bonds are to dividends stocks. Additionally, many DTD member firms are aware of the bond/equity competition when rates rise and have the resources to continue growing dividends this year to reduce some of that competition.
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