Matt DiLallo, The Motley Fool
5 min read
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The WisdomTree U.S. Quality Dividend Growth Fund focuses on high-quality companies that pay growing dividends.
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The fund weights companies based on their dividend stream.
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Its dividend yield isn't as high as other ETFs, and it has a higher expense ratio.
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10 stocks we like better than WisdomTree U.S. Quality Dividend Growth Fund ›
The WisdomTree U.S. Quality Dividend Growth Fund (NASDAQ: DGRW) is one of several exchange-traded funds (ETFs) focused on dividend-paying stocks. That dividend emphasis has made it popular among investors seeking to generate passive income.
Here's a look at whether this fund is the best option if your primary objective is to produce passive income.
The WisdomTree U.S. Quality Dividend Growth Fund aims to track the returns of larger, high-quality U.S. companies with solid track records of growing their earnings and dividends. The fund tracks the WisdomTree U.S. Quality Dividend Growth Index, which screens for the top 300 dividend-paying companies based on a combination of growth and quality factors.
The ETF weights companies in the fund based on the cash they pay out in dividends each year relative to their market cap. That weighting puts a greater emphasis on the size of a company's dividend than its overall size. Here's a slide showcasing its top 10 holdings based on its last rebalance:
As that slide shows, tech titan Microsoft has the highest target weighting in the fund, at 8%. That's a lower percentage for Microsoft than if the fund used a market cap weighting. The fund weights by dividends to help put a greater emphasis on dividend payments. That's why oil giant ExxonMobil moved up to third place despite having a much lower market cap than semiconductor behemoth Nvidia.
By weighting stocks by dividend stream relative to market cap, the fund offers a higher dividend yield. It stood at 1.8% at its last rebalance, compared with 1.3% for the S&P 500. That's because it lowered its allocation to lower-yielding dividend stocks while increasing its exposure to companies offering a higher yield, like Exxon's 3.4%. In comparison, Microsoft's payout was recently 0.7%, while Nvidia's is 0.03%.
The WisdomTree U.S. Quality Dividend Growth Fund puts a greater emphasis on growth over dividend yield. That's not a bad strategy. Historically, dividend growth stocks have delivered higher total returns than companies that don't increase their dividends, to the tune of 10.2% annualized since 1973 for the former compared with 6.8% for the latter, according to data from Ned Davis Research and Hartford Funds.
