Key Takeaways

• Dividend equities have historically shown resilience during market downturns and offer the potential for quicker recovery after losing less than other non-dividend benchmarks.
• Looking for higher dividend yields leads to significant sector tilts that become important when there is a shift from a bull market to a correction and then to a bear market.
• April 2024 has been a reminder that defensive strategies have their place, and dividends can be an important characteristic of a more defensive equity allocation.

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Equity market corrections always feel unexpected. As we sit here on May 1, 2024, we have seen the CBOE Volatility Index (VIX) increase from a level of about 12 to about 19 (Figure 1).

Figure 1: CBOE Volatility Index (VIX) over the Past Year

• Equity investors from the global financial crisis of 2008–09 have been treated to—for the most part—historically low interest rates and incredible performance of growth stocks. If you want to understand why we talk about the stocks of the Magnificent 7¹ comprising something like 30% of the S&P 500 Index², you have to understand this period. Growth stocks saw a lot of multiple expansion in a lower-interest-rate environment, and the general investor was more excited about the possibilities for appreciation than for regular dividend payments.

• Dividend equities have historically earned their stripes not when times are good and the VIX is low; they earn their stripes when times are bad and they go down less, giving themselves a chance to recover more quickly than standard benchmarks.

April 2024 is giving us at least initial indications that a market correction could be in store. Since the Magnificent 7 and the growth style have received so much attention in the past 18 months, we wanted to remind investors where to look for more defensive equity orientations.

The Dividend Continuum

All dividend-paying firms are not equal. On one end of the spectrum, think about a firm in the Utilities sector. Utilities are a regulated industry, and these companies can operate only in a highly specified and expected manner. With this low expected growth of fundamentals such as sales, cash flows and earnings, there is a lower current valuation. Another way to think about this is a higher dividend yield. On the other end of the spectrum, think about a Communication Services or Information Technology company. Meta Platforms declared a dividend in 2024,³ and it is a good, concrete example to have in mind. This firm may deliver strong growth in sales, cash flows and earnings, and this potential for strong growth leads to a higher valuation—and a lower dividend yield.

These differences become important when there is a shift from a bull market to a correction and then to a bear market.

The dividend continuum is apparent in U.S. equities across three strategies:

• The WisdomTree U.S. Quality Dividend Growth Fund (DGRW): DGRW is designed to track, before fees, the total returns of the WisdomTree U.S. Quality Dividend Growth Index. This Index includes dividend-paying firms with strong earnings growth expectations and high return-on-equity and return-on-assets metrics. These types of firms look more like Apple, Microsoft and Meta Platforms—not necessarily the highest dividend yields but much better forward-looking growth prospects.

• The WisdomTree U.S. LargeCap Dividend Fund (DLN): DLN is designed to track, before fees, the total returns of the WisdomTree U.S. LargeCap Dividend Index. This Index includes the 300 largest dividend-paying companies in the U.S. equity market, with largest ranked on the basis of market capitalization. This approach is agnostic about forward-looking growth expectations or dividend yield. There would be some higher dividend yielders and some companies with faster growth expectations.

• The WisdomTree U.S. High Dividend Fund (DHS): DHS is designed to track, before fees, the total returns of the WisdomTree U.S. High Dividend Index. This Index includes the U.S. dividend payers that rank themselves among the highest 30% on a dividend-yield basis, clearly leading to a focus on dividend yield. This should be a more defensive grouping.

Now, we know the dividend continuum, and we know that April 2024 has been a tougher month for performance of equities. Is the actual performance playing out the way we might predict in this paradigm?

April 2024 Performance

• DHS was the best performer, down the least, followed by DLN and then DGRW—but the grouping was fairly close together. A truer test could be a more protracted period of equity volatility.

• DHS, DLN and DGRW outperformed the two broader measures of U.S. value equities, the Russell 1000 Value and S&P 500 Value Indexes.

Figure 2a: Standardized Performance as of March 31, 2024

Figure 2b: April 2024

Figure 3: Year-to-Date 2024

Sector Rotation Coming?

If there is a longer-lasting sector rotation, the following compares the sector composition of various dividend strategies that could help implement a more defensive posture:

• DHS: Utilities are nearly 15%, Consumer Staples approaches 15% and Energy stands out at nearly 20%. This Energy sector tilt could help hedge some of the inflationary risk of higher energy prices.

• DGRW: It has barely any exposure to Utilities and almost 30% exposure to Information Technology.

• DLN: It has less concentration in any sector and more moderate sector tilts for a value strategy.

Figure 4: Sector Exposure

Consistently Higher Dividend Yield

With indexes, you can get a sense of consistent attributes of a given strategy and methodology.

DHS is tracking an Index that annually resets to the 30% of highest-yielding dividend payers. It will be difficult for any strategy without such a focus to deliver a higher dividend yield. 

In Figure 5, we see the significant dividend-yield advantage measured across time—a significant period.

Figure 5: Dividend Yield Over Time

Conclusion: Bringing the Recent Past Forward to Help Understand What Could Come Next

2022 was a year when the technology sector hit a downturn and dividend and value strategies stood out. 2023 brought AI and tech leadership back in force once again, and much of the start of 2024 continued that movement. April serves as a reminder that defensive strategies often focus on dividends, and there are a number of good implementation ideas depending on your conviction of the rotation. 

¹ The term Magnificent 7 gained prominence in 2023 and refers to Microsoft, Apple, Amazon.com, Alphabet, Meta Platforms, Nvidia and Tesla.

² Sources: WisdomTree, FactSet, with data as of 4/19/24.

³ “Meta Reports Fourth Quarter and Full Year 2023 Results; Initiates Quarterly Dividend,” press release, 2/1/24.

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