Apple Inc. (AAPL), Microsoft Corporation (MSFT): Screening Dividend Stocks for Future Growth (Part I)

If you have read any of my previous dividend-focused articles, you know that not only do I consider absolute yield as a factor for my selection of a company, but I also consider the number of years that the company has been paying and raising its dividend, and its five-year Dividend Growth Rate (DGR). Thus, I look at the company’s commitment to growing its dividend as well as its actual payout rate.

I recently read an article about a brand new WisdomTree Dividend ETF that is designed to select dividend-paying companies that also exhibit certain “fundamental factors” that indicate growing dividends in the future.

The managers of WisdomTree U.S. Dividend Growth Fund (NASDAQ:DGRW) say they will be looking at forward earnings projections and trailing three-year returns on equity and assets in order to determine which companies are good candidates for future dividend increases. “Rather than relying on historical records of dividend increases, DGRW uses real-time growth and quality metrics focused on companies who are growing their dividends.”

The fund will own the 300 highest-scoring companies when it runs its screens out of a universe of 1,300 stocks. With a projected 0.28% expense ratio and a goal of 2.25% yield, the fund’s investors will potentially net 2% on their investments.

Dividend growth or current dividend yield?

The argument here is that one should focus on the potential for the dividend to grow as opposed to the actual current yield. And according to this theory, the best opportunities for dividend growth in the future also seem to entail a low dividend yield currently.

One thing that the fund’s management notes is that the fund’s success or failure cannot be judged on short-term results, but that a longer period of time must be considered before the methodology reveals its potential for outperformance.

I disagree with this thesis. In my analysis, I also focus extensively on whether or not I believe a company will be able to grow its dividend over the long-term. I use different metrics than the WisdomTree managers in order to determine whether or not I believe a company is dedicated to a dividend growth strategy.

And I don’t think that an investor has to sacrifice current yield in order to secure the potential for future dividend growth. In fact, I’m out to prove exactly that with my Perfect Dividend Portfolio. It’s definitely possible to achieve high current yield (higher than 3%) along with excellent potential for future dividend growth.

Why historical dividend metrics matter

I have a couple of problems with the way that WisdomTree is promoting this new fund.

First of all, they are disparaging historical dividend metrics, saying that such information is backward-looking. Of course it is. And although past performance is not a prediction of future performance, in the case of dividend-paying and dividend-raising, it tends to be an excellent indicator of future performance. Companies that have built up a reputation for a significant time period of raising dividends are reluctant to break that streak.