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ETF Specialist

A Dividend-Themed Strategic-Beta ETF From WisdomTree

With a simple approach to dividend investing, this fund’s performance has earned 4 stars.

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WisdomTree LargeCap Dividend ETF (DLN) provides a handy alternative U.S. equity core holding for investors who want a value tilt and extra income. This fund targets high-dividend-paying companies and forgoes the standard market-capitalization weighting scheme traditional market indexes, such as the S&P 500, use. Instead, WisdomTree has an annual rebalancing in December when it assesses how much each company plans to pay in dividends over the next year and then weights each company's common stock by its percentage of the total planned dividend payout of all companies in the portfolio. This means that the top companies in DLN's portfolio are still the mega-caps, such as  Exxon Mobil (XOM) and  Procter & Gamble (PG). But it provides a more distinct value flavor by excluding non-dividend-paying companies and larger stakes in high-yielding but volatile smaller-cap companies.

Historically, a large portion of the returns from investing in stocks has come from dividends. However, stocks that pay unsustainably high dividends are often distressed and are likely to see their dividends and share prices fall in the future. By weighting stocks by total dollar payout, rather than by dividend yield, this fund attempts to avoid overweighting stocks that are likely to cut their dividends. Still, there is also no guarantee that firms that have paid or increased dividends in the past will continue to do so. The portfolio shies away from higher-growth, lower-yielding sectors, such as technology, business, and consumer services, while loading up on the traditional dividend-heavy industries, such as utilities. This does not lead to a lower-quality portfolio, just one in which more of the profits are distributed to shareholders rather than reinvested in the business.

To see how the fund’s unique approach to dividend investing works, consider a portfolio of the following three stocks. The first two are large-cap companies that pay a large dollar amount of dividends, but with relatively small yields. The third is a risky small-cap company with a high yield. By weighting the stocks by dollar amount of dividends, the risky company gets a small weighting. On the other hand, a portfolio that weights based on dividend yield would put its largest weighting in the volatile small-cap company. Because larger companies tend to pay out more in absolute dollars, the fund's dividend weighting approach balances yield against market capitalization. As a result, the portfolio isn't dominated by either low-yielding mega-cap stocks or very high-yielding, risky names (as might result from a naive dividend-yield approach).

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Michael Rawson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.