Quality, Dividend Growth Under One ETF Roof

MarketsETF Trends

This article was originally published on ETFTrends.com.

Investors looking for quality, dividend-paying stocks under the roof of a single exchange traded fund have a solid idea to consider with the WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ: DGRW).

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DGRW includes companies with high long-term earnings-growth forecasts for the next three to five years and weights components based on the value of dividends they are expected to pay over the next year. The ETF tracks the WisdomTree U.S. Dividend Growth Index (WTDGI), which evaluates companies based on earnings quality, return on assets (ROA) and return on equity (ROE).

Valuing high quality value is particularly important as bull markets enter their waning stages, as some market observers believe the current bull market is doing. In the early stages of bull markets, lower quality companies see their shares soar. However, as the bull matures, investors often exhibit a preference for higher quality fare with more compelling valuations.

DGRW Mechanics in U.S. Equities

“DGRW can fill an asset allocation’s U.S. equity sleeve because the nature of the screen—300 companies weighted by their dividend amounts—identifies mainstream top holdings like Exxon Mobil, Johnson & Johnson and Wells Fargo. It’s a broad allocation that is designed for major pieces of portfolios,” said WisdomTree in a recent note.

Specifically, the quality factor tries to identify companies that exhibit persistent profitability and low leverage in every type of economic market environment.

Profitability measures the efficiency of a business in terms of how well it can produce a return on investment. Consequently, an observer would look at a company’s ROA to gauge profitability as it is calculated by dividing net income by total assets and measures how well a firm deploys its assets to generate earnings, so those with higher ROAs are considered more profitable.

Related: One of the Least Expensive Japan ETFs: JPN

DGRW also represents a compelling alternative to traditional S&P 500 funds, particularly at a time when valuations on U.S. stocks look a little stretched.

“If their portfolio mimics the S&P, they will have stocks that pay a 1.89% dividend, trade for 20 times forward earnings and have an ROE of 13.8%. Or they can take the other path, which displays ROEs that are significantly higher than those of the S&P, with a lower P/E (18.9) and a higher dividend yield (2.19%),” according to WisdomTree.

The $2 billion DGRW pays a monthly dividend.

For more on smart beta ETFs, visit our Smart Beta Channel.

Tom Lydon’s clients own shares of DGRW.

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