But Is Your Dividend Index Even In The Game?

 WisdomTree Research
MARKET INSIGHTS [ September 2012 ]
Cisco’s 75% Dividend Growth Could Be A Game Changer.
But Is Your Dividend Index Even In The Game?
BY JEREMY SCHWARTZ, CFA, DIRECTOR OF RESEARCH
& CHRISTOPHER GANNATTI, RESEARCH ANALYST,
Note: All data is as of the time of this writing, August 20, 2012, unless otherwise stated.
As dividend growth continues to be a popular topic in today’s market environment, one question we are often asked is what
“screens” WisdomTree (WT) employs to capture dividend growth. Our answer: none. We designed our U.S. Dividend Indexes
to be broadly inclusive and representative of the U.S. dividend-paying equity universe, and we believe our methodology helps
enable our Indexes to best capture dividend growth.
At first, this answer may be surprising. Three of the largest dividend-focused exchange-traded funds (ETFs) are designed to
track indexes that do include screens for dividend growth. They include:
+The Dow Jones U.S. Select Dividend Index, licensed by iShares, requires five-year non-negative dividend per
share growth.
+The Mergent Dividend Achievers Select Index, licensed by Vanguard, requires 10 consecutive years of positive
dividend growth.
+And the S&P High Yield Dividend Aristocrats Index, licensed by State Street, requires 20 consecutive years of
positive dividend growth.
While we recognize that growth screens may sound attractive, they can also lead to narrow baskets of stocks by dramatically
reducing the overall number of qualifying companies. Put another way, the methodologies referenced above that “screen for
growth” actually have the potential to inhibit their own dividend growth potential by leaving out the most recent dividend
growers. Companies that do not pass those restrictive dividend growth screens tend to be new, up-and-coming dividend payers
or those that previously cut but then reinstated dividends.
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WisdomTree Research MARKET INSIGHTS [ September 2012 ]
FIGURE 1: APPLE RE-INSTATES A DIVIDEND FOR THE FIRST TIME SINCE 1996
As of 8/20/2012, Apple is not a Constituent of the WT Dividend Index.
Indicated Cash Dividends
(in USD billions)
Apple, Inc.
$9.94
Ranking Statistics:
Relative to Indicated Cash Dividends of 8/20/2012 WT Dividend Index Constituents
Information Technology Sector
#1 (of 93)
All Constituents
#3 (of 1,258)
Sources: WisdomTree, Bloomberg
For example, Apple recently introduced its first dividend since completely suspending it in February of 1996. Now, it is important
to note that Apple is not yet a constituent of the WT Dividend Index (WTDI) or the WT LargeCap Dividend Index (WTLDI), but
as of today the company has paid its first dividend, has initiated a regular dividend policy and meets all the trading volume
requirements of the WTDI. If these conditions remain unchanged through the November 30, 2012, Index screening date, Apple
could be eligible for inclusion in WTDI for the first time. This is quite remarkable because Apple’s current indicated cash
dividend2 ranked first among the 93 information technology sector constituents and third among all current constituents of the
WDTI, in which firms are weighted by indicated cash dividends. It is rare that a firm begins a new dividend policy with such fervor,
and it is notable that even given the scale of Apple’s indicated cash dividends, within the three methodologies mentioned
earlier, a waiting period of at least five years would be prescribed before it could become eligible for inclusion.
CISCO: DIVIDEND GROWTH IN ACTION
Cisco is another newly minted dividend payer from the technology sector. It’s also a timely illustration of how our methodology
works to capture dividend growth. Cisco introduced its first dividend in April of 2011. In our February Market Insights, we noted
that Cisco was indicated to be the 40th-largest dividend payer in the U.S. based on its indicated cash dividends3. We further
projected that based on current trends the company could grow to be one of the 20 largest dividend payers within three to five
years. As it turns out, Cisco’s 75% dividend increase this month catapults the firm to a projected rank, as the 22nd largest payer4,
a major leap in only one year’s time.
The crucial point: Once Cisco paid its first dividend in April of 2011, it became eligible for inclusion in WT’s U.S. Dividend
Indexes as of the following index screening (which occurred in November of 2011). By contrast, Cisco will not become eligible
for the Dow Jones U.S. Select Dividend Index until at least 2016, for the Mergent Dividend Achievers Select Index until at least
2022, and for the S&P High Yield Dividend Aristocrats Index until at least 2032. And even then eligibility will be contingent upon
Cisco’s increasing its dividend each year and meeting the other criteria for inclusion in these indexes at that point in time.
2
3
4
Indicated cash dividends: For each firm, indicated dividends per share are multiplied by shares outstanding as of the specified dates.
Based on the 11/30/2011 screening for the WTDI, a screening that does not include any growth-of-dividend qualifications to determine constituent eligibility.
Based on ranking the constituents of the WTDI by their indicated cash dividends as of 8/20/2012.
2
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WisdomTree Research MARKET INSIGHTS [ September 2012 ]
TECH STOCKS LEADING DIVIDEND GROWTH
The blockbuster dividend announcement recently made by Cisco exemplifies a growing trend within the information technology
sector of firms initiating and increasing dividends. In fact, since the November 30, 2007, WTDI rebalance, this sector’s share
of the indicated dividend stream5 of the United States has grown remarkably. At the WT Index screening date in November
2007, the sector represented a mere 5.6% of all dividends paid in the U.S. From then until now, information technology sector
dividends have grown over 92% on a cumulative basis, making up over 10% of the indicated dividend stream. By contrast, the
overall growth in indicated dividends across all 10 sectors was approximately 6.27%.
FIGURE 2: TOTAL INDICATED ANNUAL DIVIDENDS [ in USD billions, unless % ]
Indicated Cash Dividend Stream
(in USD, billions)
Size Relative to WisdomTree Dividend Index
(in %, as of specified dates)
Dates
Apple, Inc.6
WisdomTree
Dividend Index Information
Technology Sector
WisdomTree
Dividend Index
Apple, Inc.6
WisdomTree
Dividend Index Infromation
Technology Sector
11/30/2007
$0.00
$16.17
$288.53
0.00%
5.60%
11/30/2008
$0.00
$17.89
$267.25
0.00%
6.69%
11/30/2009
$0.00
$19.27
$220.92
0.00%
8.72%
11/30/2010
$0.00
$22.18
$243.86
0.00%
9.10%
11/30/2011
$0.00
$27.51
$283.98
0.00%
9.69%
8/20/2012
$9.94
$31.11
$306.63
3.24%
10.15%
Information Technology
Sector
WisdomTree Dividend
Index
92.39%
6.27%
Cumulative Growth
in Dividends
(11/30/2007– 8/20/2012)
N/A
Sources: WisdomTree, Bloomberg
It is also interesting to use this information to draw out a further point about Apple. Apple is currently the largest company
by market capitalization in the United States and the world. We can say that $9.94 billion in indicated cash dividends is equal
to over 3% of the dividends paid by all other U.S. companies in the WTDI—a sizeable figure for a firm newly reinstituting a
dividend policy.
5
6
Indicated dividend stream: Indicated cash dividends for each constituent in an Index (in this case the WTDI) are added up.
As of 8/20/2012, Apple, Inc., had an indicated cash dividend stream of $9.94 billion, but it is not a constituent of the WTDI Index.
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WisdomTree Research MARKET INSIGHTS [ September 2012 ]
As shown in figure 1, Apple ranks as the top dividend payer in the information technology sector and the third-largest payer overall.
Similarly, Cisco’s recent 75% increase in dividends per share brings home the point that information technology companies are now
driving dividend growth across U.S. equities.
More fundamentally, WT believes its index methodology is the benchmark for dividend-based investment strategies. This is
because we believe that one of the most important benchmarking criteria regards being broadly inclusive—a factor built into
WT’s Index methodology. The WTDI—our broadest U.S. dividend Index—adopted an inclusive set of approximately 1,300
dividend payers in the United States as of the November 30, 2011, Index screening date. We believe this Index measures the
performance of typical dividend-paying stocks in the U.S. in the same way a market cap-weighted7 index represents the average
performance of a particular universe of stocks.
INTRODUCTION OF STOCK SELECTION RISK
Once an index starts to apply filters and screens with strict requirements as part of its methodology, it introduces a measure of
stock selection risk8, which tends to resemble active manager9 attempting to select what they believe are the stocks with the
strongest potential, dividend-based or otherwise. To illustrate this point, we examine how many of the 20 largest dividend payers
in the U.S. these “dividend growth screen” indexes actually hold and what percentage of widely followed market capitalization
indexes of U.S. equities they represent.
TWENTY LARGEST DIVIDEND PAYERS
The WTDI is weighted by the indicated cash dividend stream for each of its constituent firms. As of the November 30, 2011,
Index screening date, this represented over $280 billion in dividends and encompassed over 1,300 firms. We arrive at the list of
20 firms shown in figure 3A—the firms with the largest indicated dividend streams in the U.S. Aside from the WT Dividend and
LargeCap Dividend Indexes, which would include all 20 of the firms shown, all of the “growth screen” indexes exclude at least
12 of the 20 largest dividend payers. In fact, seven of these top 20 are excluded from all three.
Market cap-weighted: Market cap = (share prices) x (number of shares outstanding). Firms with the highest values receive the highest weights.
Stock selection-risk: A type of investment risk that increases as the number of firms within an index decreases, since the performance is measuring a narrower
subset of stocks.
9
Active managers: Investment managers whose stated mandate does not include tracking the returns of a particular index after costs, fees and expenses.
7
8
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WisdomTree Research MARKET INSIGHTS [ September 2012 ]
FIGURE 3A: INCLUSION & EXCLUSION OF THE 20 LARGEST DIVIDEND PAYERS [ As of 8/20/2012 ]
Dividend
Stream
Rank
as of
8/20/2012 Ticker
1
XOM
Firm Name
Sector
Dividend
Stream
(USD
Billions)
Indicated
Dividends- Indicated
per-Share Dividends(1-Year
per-Share
Ago:
(Current:
8/20/2011) 8/20/2012)
Year
over Year
Indicated
Dividend
Growth
S&P High
Yield
Dividend
Aristocrats
Index
Mergent
Dividend
Achievers
Select
Index
Dow Jones
U.S. Select
Dividend
Index
EXXON MOBIL CORP
Energy
$10.52
$1.88
$2.28
21.28%
Included
Included
Excluded
Telecommunication
Services
$10.15
$1.72
$1.76
2.33%
Included
Excluded
Included
Excluded
Included
2
T
AT&T INC.
3
GE
GENERAL ELECTRIC CO. Industrials
$7.20
$0.60
$0.68
13.33%
Excluded
4
CVX
CHEVRON CORP
$7.06
$3.12
$3.60
15.38%
Included
Included
Included
5
JNJ
JOHNSON & JOHNSON Health Care
$6.73
$2.28
$2.44
7.02%
Included
Excluded
Excluded
6
MSFT MICROSOFT CORP
Information
Technology
$6.71
$0.64
$0.80
25.00%
Excluded
Excluded
Excluded
7
PFE
PFIZER INC.
Health Care
$6.57
$0.80
$0.88
10.00%
Excluded
Excluded
Included
8
PG
PROCTER & GAMBLE
CO/THE
Consumer Staples
$6.19
$2.10
$2.25
7.05%
Included
Included
Excluded
9
VZ
VERIZON
COMMUNICATIONS
INC.
Telecommunication
Services
$5.70
$1.95
$2.00
2.56%
Excluded
Excluded
Excluded
WMT
WAL-MART STORES INC. Consumer Staples
$5.38
$1.46
$1.59
8.90%
Included
Included
Excluded
11
PM
PHILIP MORRIS
INTERNATIONAL
Consumer Staples
$5.25
$2.56
$3.08
20.31%
Excluded
Excluded
Excluded
12
MRK
MERCK & CO. INC.
Health Care
$5.12
$1.52
$1.68
10.53%
Excluded
Excluded
Included
10
Energy
Excluded
from All 3
Yes
Yes
Yes
13
WFC
WELLS FARGO & CO.
Financials
$4.65
$0.48
$0.88
83.33%
Excluded
Excluded
Excluded
14
KO
COCA-COLA CO/THE
Consumer Staples
$4.59
$0.94
$1.02
8.51%
Included
Included
Included
15
JPM
JPMORGAN CHASE
& CO.
Financials
$4.56
$1.00
$1.20
20.00%
Excluded
Excluded
Excluded
Yes
16
INTC
INTEL CORP
Information
Technology
$4.50
$0.84
$0.90
7.14%
Excluded
Excluded
Excluded
Yes
17
IBM
INTL BUSINESS
MACHINES CORP
Information
Technology
$3.89
$3.00
$3.40
13.33%
Excluded
Included
Excluded
18
PEP
PEPSICO INC.
Consumer Staples
$3.35
$2.06
$2.15
4.37%
Included
Included
Excluded
19
MO
ALTRIA GROUP INC.
Consumer Staples
$3.34
$1.52
$1.64
7.89%
Excluded
Excluded
Included
20
COP
CONOCOPHILLIPS
Energy
$3.21
$2.64
$2.64
0.00%
Excluded
Excluded
Excluded
TOTAL /AVERAGE
$114.67
Yes
Yes
14.41%
Sources: WisdomTree, Bloomberg
You cannot invest directly in an index. Holdings subject to change.
It is important to note that dividend growth screens are not the only requirements for index constituents. The S&P High Yield
Dividend Aristocrats Index, for instance—with its requirement of 20 consecutive years of dividend growth—actually includes more
of the 20 largest dividend payers than the Dow Jones U.S. Select Dividend Index with its 5-year requirement of non-negative
dividend growth.
This summary table illustrates the crucial consequence of increased stock selection risk as it relates to the top 20 firms in the U.S.,
ranked by indicated cash dividends.
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WisdomTree Research MARKET INSIGHTS [ September 2012 ]
FIGURE 3B: GROWTH AND INCLUSION SUMMARY [ Inclusion as of 8/20/2012; Growth from 8/20/2011– 8/20/2012 ]
S&P High Yield Dividend
Aristocrats Index
Number Included:
Avg. Growth of Indicated DPS
8
Mergent Dividend Achievers
Select Index
7
13
Dow Jones U.S. Select
Dividend Index
7
Number Excluded:
12
Included Firms:
9.35%
11.26%
9.71%
13
Excluded Firms:
17.79%
16.11%
16.95%
20 Top Payers:
14.41%
14.41%
14.41%
+Inclusion vs. Exclusion: The S&P High Yield Dividend Aristocrats Index included the most (eight) of the top 20
dividend payers by indicated cash dividends.
+Growth of Indicated Dividends per Share (DPS): On average, the top 20 dividend payers increased their indicated
DPS by nearly 14.5% year over year. Each of the three indexes shown had methodologies that included firms
that, on average, grew their indicated DPS approximately 3% to 5% below this average. On the other hand,
these same methodologies excluded firms that grew their indicated dividends per share approximately 2% to
3% above this average.
EXPOSURE TO THE BROADER EQUITY MARKET
The dividend growth trend is not just happening in the technology sector. Companies that have made a dividend payment in
the past 12 months make up:
+nearly 90% of the S&P 500 Index;
+nearly 85% of the Russell 1000 Index;
+nearly 82% of the Russell 3000 Index.
The S&P 500 and Russell 1000 Indexes are discussed here because they are two of the most widely followed and referenced
benchmarks of the performance of large-capitalization U.S. equities, while the Russell 3000 Index has been selected as an
important performance benchmark of U.S. equities across the market capitalization spectrum. Weight is the percentage of each
specified index measured by market cap.
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WisdomTree Research MARKET INSIGHTS [ September 2012 ]
We think the analysis suggests an answer to the important question, how much of the so-called broad market capitalization
benchmarks need to be excluded in order to provide a dividend focus?
FIGURE 4: CONSEQUENCES OF A DIVIDEND FOCUS [ As of 8/20/2012 ]
Coverage of Broad Index by Dividend-Focused Index
S&P 500 Index
# of Stocks
# of Dividend
Payers
Weight In
Dividend
Payers
WisdomTree
LargeCap
Dividend
Index
WisdomTree
Dividend
Index
S&P High
Yield Dividend
Aristocrats
Index
Mergent
Dividend
Achievers
Select Index
Dow Jones
U.S. Select
Dividend
Index
500
403
88.56%
76.10%
79.54%
20.61%
21.21%
18.46%
Russell 1000 Index
986
682
84.64%
67.54%
75.21%
18.61%
19.28%
16.59%
Russell 3000 Index
2,972
1,500
81.85%
62.53%
72.55%
17.27%
18.10%
15.52%
Sources: WisdomTree, Bloomberg
You cannot invest directly in an index.
Whether these three market capitalization-weighted indexes represent the most appropriate benchmarks of U.S. equity-based
strategies of any type or not, it is important to note that performance comparisons are often made against them. The greater the
percentage of their market capitalizations that are excluded, the greater the potential that exists for differences in performance—
be they positive or negative.
CONCLUSION
As is often the case with indexes measuring the performance of various equity universes, it is important to dig into their equity
selection rules to see which types of stocks are being excluded and which are being included. The initial reaction to any
consistency of dividend growth screens, especially after the financial crisis of 2008–09, which saw dividends in the financial sector
basically collapse, is one of potentially lower risk. However, we would argue that these screens in certain ways can potentially
increase the risk of missing dividend growth from both new growers and re-initiators, not to mention the additional risk of
narrowing the potential selection universe.
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WisdomTree Research MARKET INSIGHTS [ September 2012 ]
APPENDIX: CONSTITUENT WEIGHTS IN WTDI AND WTLDI [ As of 8/20/2012 ]
Weight in WTDI as of 8/20/2012
Weight in WTLDI as of 8/20/2012
EXXON MOBIL CORP.
3.09%
3.60%
AT&T INC.
4.04%
4.70%
Ticker
XOM
T
Firm Name
GE
GENERAL ELECTRIC CO.
2.47%
2.88%
CVX
CHEVRON CORP.
2.24%
2.60%
JNJ
JOHNSON & JOHNSON
2.07%
2.40%
MICROSOFT CORP.
2.50%
2.91%
PFIZER INC.
2.18%
2.54%
PG
PROCTER & GAMBLE CO./THE
1.85%
2.16%
VZ
VERIZON COMMUNICATIONS INC.
2.00%
2.33%
MSFT
PFE
WAL-MART STORES INC.
1.95%
2.27%
PM
PHILIP MORRIS INTERNATIONAL
2.06%
2.40%
MRK
MERCK & CO. INC.
1.95%
2.27%
WFC
WELLS FARGO & CO.
1.03%
1.20%
KO
COCA-COLA CO./THE
1.58%
1.83%
WMT
JPM
JPMORGAN CHASE & CO.
1.40%
1.62%
INTC
INTEL CORP.
1.49%
1.73%
IBM
INTL BUSINESS MACHINES CORP.
1.16%
1.35%
PEP
PEPSICO INC.
1.14%
1.33%
MO
ALTRIA GROUP INC.
1.28%
1.49%
COP
CONOCOPHILLIPS
0.90%
1.05%
AAPL
APPLE, INC.
0.00%
0.00%
CSCO
CISCO SYSTEMS, INC.
0.42%
0.49%
Unless otherwise stated, data source is WisdomTree.
Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing.
To obtain a prospectus containing this and other important information, call 866.909.WISE (9473) or visit wisdomtree.com.
Read the prospectus carefully before you invest.
There are risks involved with investing, including possible loss of principal. Foreign investing involves currency, political and
economic risk. Funds focusing on a single country, sector and/or funds that emphasize investments in smaller companies
may experience greater price volatility. Investments in emerging markets, currency, fixed income and alternative investments
include additional risks. Please see prospectus for discussion of risks.
WT Dividend Index: Measures the performance of dividend-paying companies incorporated in the United States that pay regular cash dividends and meet WT’s
eligibility requirements. Weighted by indicated cash dividends. WT LargeCap Dividend Index: Measures the performance of the 300 largest firms by market
capitalization from the WT Dividend Index. Weighting is by indicated cash dividends. S&P 500 Index: Market capitalization-weighted benchmark of 500 stocks
selected by the Standard and Poor’s Index Committee, designed to represent the performance of the leading industries in the United States economy. Russell
1000 Index: A measure of the performance of the 1,000 largest companies by market capitalization in the Russell 3000 Index. Russell 3000 Index: Measures the
performance of the 3,000 largest U.S. companies based on total market capitalization. Dow Jones U.S. Select Dividend Index: Measures the performance of
100 dividend-paying U.S. companies. Mergent Dividend Achievers Select Index: Designed to track the performance of dividend-paying companies in the U.S.
that have increased their annual dividend payments for the last 10 or more consecutive years. S&P High Yield Dividend Aristocrats Index: Designed to track the
performance of dividend-paying companies in the U.S. that have increased their annual dividend payments for the last 20 or more consecutive years.
WisdomTree Funds are distributed by ALPS Distributors, Inc.
Jeremy Schwartz and Christopher Gannatti are registered representatives of ALPS Distributors, Inc.
© 2012 WisdomTree Investments, Inc. “WisdomTree” is a registered mark of WisdomTree Investments, Inc.
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