U.S. Quality Dividend Growth: An Alternative To The S&P 500

We are coming up on five years since we launched the WisdomTree U.S. Quality Dividend Growth Fund (DGRW), our $2.13 billion ETF¹ that tracks the WisdomTree U.S. Quality Dividend Growth Index. Its benchmark is the NASDAQ US Dividend Achievers Select Index, but figure 1 also includes the S&P High Yield Dividend Aristocrats and the S&P 500 Indexes.

Figure 1: WisdomTree U.S. Quality Dividend Growth Index (Hedged Units) Performance

 The Fundamentals Quilt

Figure 2 shows a “periodic table” or “quilt” for the fundamentals of the WisdomTree U.S. Quality Dividend Growth Index, along with the other Indexes.

The top of the table is most desirable, and each appearance there gets 3 “points,” with lower points below. The far-right column sums the points. For example, the S&P High Yield Dividend Aristocrats Index’s 2.60% dividend yield is the highest of the four Indexes, so it gets 3 points for that column. The Index’s sum of 10 points for all columns is shown on the right.

Strikingly, the S&P 500 often appears in the very last row. It gets just 7 points. The WisdomTree Index gets 13.

Figure 2: U.S. Equity Fundamentals “Quilt”

Smart “Beta” or Modern “Alpha”?

A metric in figure 2 jumps out for investors who focus on profitability for shareholder wealth creation—and that’s the WisdomTree Index’s 21.3% return on equity, about 8 percentage points more than the S&P 500. Both the WisdomTree Index and the S&P 500 pay out a bit more than 40% of their earnings in dividends, retaining the rest. Investors have a choice with respect to the nearly 60% of earnings retained: own a collection of firms that redeploy capital at middling ROEs or own a different group at high ROEs.

That’s how we designed the Index; the strategy is to improve upon the S&P’s profitability metrics, not mirror them. What we’re doing isn’t smart beta; it’s something else, a rules-based alpha generator. It’s modern alpha.