Global dividends are rebounding at a remarkable pace this year, and Europe is participating in that trend. As encouraging as this trend is, it’s not an invitation for investors to eschew selectivity.
The rampant dividend cutting — Europe was a big offender — experienced in 2020 at the hands of the ongoing coronavirus pandemic serves as a reminder that investors need to focus on durability, quality, and sustainability when it comes to equity income. The WisdomTree Europe Quality Dividend Growth Fund (EUDG ) checks those boxes.
EUDG tracks the WisdomTree Europe Dividend Growth Index, “a fundamentally weighted index that measures the performance of dividend-paying common stocks with growth characteristics selected from the WisdomTree DEFA Index,” according to WisdomTree.
EUDG stands apart from other dividend ETFs because it doesn’t emphasize yield or focus on components’ prior histories of payout increases. It employs a more unique methodology, one that can potentially be more effective for long-term investors.
“The quality score is based on three-year trends in return on equity and return on assets, while the growth score assesses long-term earnings growth expectations,” says WisdomTree analyst Brian Manby. “The unique methodology results in an equity basket exhibiting high-quality characteristics: healthy balance sheets, efficient operations, lower leverage and the capability to generate strong returns from equity and asset bases.”
On the basis of ROA, leverage, and dividend growth potential, EUDG easily tops the MSCI Europe Index, and it beats the S&P 500 on three of those four metrics. That might imply that EUDG is richly valued, but the opposite is true.
“But it is also available at a 13% valuation discount to the region while Europe already tends to trade at a large discount to the U.S., partly because of a lack of high-quality companies. EUDG improves on these measures at home, but also overshadows the U.S. market by allocating to the 300 highest quality stocks,” according to Manby.
With those positive attributes, it’s not surprising that EUDG beat the MSCI Europe Index over the trailing one-, three-, and five-year periods. Alone, that’s impressive, but there’s more to the story.
“More impressively, EUDG achieved its longer-term success with a lower beta. It also captured virtually all of the MSCI Europe Index’s gains in up periods, while only absorbing about 90%–92% of its corresponding losses in down periods. That resulted in reduced volatility over the same timeframes,” concludes Manby.
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