WisdomTree CIO Betting on Dividend Stocks
Jeremy Schwartz, chief investment officer at WisdomTree Asset Management, says this value cycle is here to stay, and that the best bang for your buck is dividend stocks and funds.
Schwartz, who helps lead the firm in charge of more than 78 exchange-traded funds, recently spoke with ETF.com. He is the co-author of “Stocks for the Long Run: The Definitive Guide to Financial Market Returns & Long-Term Investment Strategies” alongside Jeremy Siegel, professor of finance at the Wharton School of the University of Pennsylvania.
This conversation was lightly edited for brevity and clarity.
ETF.com: We’re currently in a rotation from growth into value investing; how long will this rotation last?
Jeremy Schwartz: The last 15 years, really, since WisdomTree was born in 2006, was the start of a tremendous age for growth investing. The very largest FAANGM stocks had a tremendous run. What drove their performance were very good strong earnings growth. But now that's definitely not the case; you've seen widening valuations and more expensive multiples for the largest stocks in the market.
What's happened this year, with the Fed’s pivot and change, there's been a compression in multiples for the highest multiple stocks. The more your multiples grew, the more you had to fall. You’ve seen that even on a day like today [Oct. 10, 2022], more pressure on some of the bond markets, and you see the negative growth stocks having the harshest reaction in the market. We think it’s a discernible longer cycle, and that's not like a one-year-and-over cycle. There’s a relative valuation opportunity that is still very good for truly high dividend stocks.
ETF.com: Where should investors in ETFs be looking right now?
Schwartz: The one ETF I like for that value story is the WisdomTree U.S. High Dividend Fund (DHS), which is high dividend U.S. stocks. It’s been selling below 11 times earnings, which is a 9% earnings yield, roughly a 4% dividend.
It’s really having a very strong relative performance versus the S&P 500 and other value stocks. It’s been doing very, very well. Even in a year where value beats growth, the high dividend value stocks are doing even better and are still relatively low priced, versus everything else.
We’re also favoring small caps. You might think small caps for the recession isn’t the way to go, but they're getting nine to 10 times earnings. Whether it’s the WisdomTree U.S. SmallCap Fund (EES) for broad earnings, the WisdomTree U.S. SmallCap Dividend Fund (DES) for dividends or the WisdomTree U.S. Smallcap Quality Dividend Growth Fund (DGRS), we've been saying they’re overly pricing in the recession scenario.
We start with the profitable company universe, so you don't have pressure on that unprofitable tech segment. That's really been what's been hammered the most this year with the changing valuation setting.
ETF.com: There’s been a lot of commentary following the release of the hotter-than-expected jobs report about another possible 75 basis point rate hike coming in November. What does this mean for the market, and what can we expect to see?
Schwartz: The Fed wants to get positive real rates across the curve. So there's the question, do they need to bring the short-term rates above inflation? That's one of those key questions right now.
We look at how much real yields have increased this year, referring to what's reflected in the Treasury inflation-protected securities market, and you've had over a 200 basis point increase. It started the year at negative 1%.
That was a big shift, and it's gone to being really positive across the curve from being very negative across the curve. You’ve had a big adjustment. From a long-term perspective, we might think those rates are higher than they otherwise need to be on a longer basis.
ETF.com: What would a higher fed funds rate mean for a dividend strategy?
Schwartz: The market is worried that the Fed is getting overly tight, and that shows a deeper recession. Dividends are definitely more conservative, and you can see that being reflected in performance this year, that dividends have held up the best with all the volatility.
Another hike indicates it's going to be a continued environment of what's been happening all year. You see it on a day like [Oct. 10, 2022]—it's a classic day of high growth stocks selling off and dividend stocks holding up much better.
Contact Shubham Saharan at shubham.saharan@etf.com
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