DHS - DHS: Don't Expect Much Beyond Income

2023-07-29 03:35:53 ET

Summary

• WisdomTree U.S. High Dividend Fund ETF has a yield of 4.11% but has historically underperformed the overall market.
• The fund can still offer value for certain types of investors.
• The fund enjoys a cheap valuation, but cheap stocks can remain cheap for a long time.

WisdomTree U.S. High Dividend Fund ETF (DHS) is a purely income play with a yield of 4.11% which has historically resulted in good income generation along with dividend hikes but it has also lagged behind overall market performance due to its choice of many stocks that turned out to be underperformers. In the last decade, the fund has resulted in a total return of 120% versus overall market performance (SPY) of 222% during the same period.

The fund holds 388 stocks but it's top heavy with top 10 holdings accounting for 37% of the fund's total weight. While most of the fund's top holdings are historically known to be dividend growers supporting high yields, many of them are also known to lag in performance in recent years such as Philip Morris International (PM), Pfizer (PFE), AT&T (T) and Altria (MO). The fund only invests in American stocks for it's fair to call this a domestic fund but also keep in mind that a lot of the businesses owned by this fund operate globally, and their revenues could come from anywhere in the world so in a sense one could say that it invests in global businesses that are headquartered in the US.

Going back last 5 years, most of these stocks haven't fared well in terms of stock price performance and almost every single one of them underperformed which is concerning. Of course, it may be ok if you are in it for purely dividend and don't mind your principal not growing much (or even declining over time).

Despite poor performance of their stock price in general, many of these stocks are actually solid growers of dividend. In the last decade, these stocks hiked their dividends anywhere from 35% to 270% with average being about 5% annual growth. This should be above the rate of inflation in most years, with the exception of 2022 of course. Just because a stock has been growing its dividends for a while doesn't mean its dividends are safe though. Recently we've seen Intel (INTC) cut its dividends by more than 2/3 after having grown them for decades.

One of this fund's biggest holdings is Altria which has an interesting history. If you look at total returns for the last 30 years, the stock actually outperformed the overall market by a pretty wide margin. Over the years this was considered a dream stock for retirees, income seekers as well as growth investors. Whether your goal was to obtain current income, participate in dividend growth or stock price appreciation, this stock used to offer it all. But then the stock's growth came to a halt and it's been underperforming for a while now. Tobacco is a declining industry due to both people's habits and increasing regulations and the company is trying to diversify to new sources of income such as alcohol and electronic cigarettes in order to keeps its growth alive.

Valuation-wise, the fund is actually pretty cheap because it holds a lot of stocks with low multiples especially when you consider how top-heavy the fund is. The fund generally invests in low-multiple sectors such as energy and tobacco, so it's not surprising that the fund's average P/E ratio is 11, average price to book ratio is 2.0, average price to sales ratio is 1.37 and most impressively its average price to cash flow ratio is 6.98. This is pretty cheap compared to the overall market where most of these metrics are twice what you see in this fund. Unfortunately for value investors, cheap stocks tend to remain cheap for a long time and expensive stocks tend to get even more expensive over time, so they might be disappointed to find out that buying the cheapest stocks don't always result in outperformance. At least we can tell from these metrics that dividends should be fairly safe for majority of this fund's holdings for the time being.

In the last decade, we've seen this fund's dividends grow at a slow but steady rate year after year. If this fund's history is our guide, we can expect its dividends to grow about 4-6% per year, with average being 5%. Also keep in mind that a lot of this fund's holdings are not only generous dividend payers but also aggressive repurchasers of their own stock which should help them grow their per-share dividends for quite some time.

Historically, this fund usually had a yield ranging from 2.5% to 4.5% and its current yield is on the higher end of this range. This means investors buying the fund today will get a higher dividend than those who bought the fund at almost any time in the last decade which is a positive but keep in mind that you will still get a yield below the yield of short-term treasuries at 5.5%.

The fund doesn't use any leverage and it doesn't use any other methods (such as writing covered calls) to generate yield. Virtually all of the fund's yields come from the dividends it receives from its holdings with small exceptions of long-term capital gains here and there. As a result, the fund's dividends can be treated as qualified dividends for tax purposes and they should generally enjoy a low tax rate as compared to some other funds which use other methods to generate income. If you are holding this fund in a non-taxable account such as 401k, this shouldn't matter anyways.

All in all, this is a decent fund for generating income but don't expect more from it. The fund is not likely to outperform overall market returns perhaps with the exception of during bear markets. As you can see below, this fund outperformed by a quite margin last year during the bear market but bear markets tend to be rare and I wouldn't bet on this fund outperforming the overall market in the long run.

If you are a retiree who just wants to generate about 4% yield coupled with 5% dividend growth and 1-2% share price appreciation, this may be the fund for you but most investors can probably be better off buying an index fund and holding.

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