Is it time for a good quality yield strategy?

The markets are currently not exuding much enthusiasm and the news is, at best, middling. Uncertainty in the banking sector, slow growth in the UK, Eurozone and the US, Russia-Ukraine news, and China tensions have temporarily put off some investors from being in the market.

And yet there are solid investment strategies out there which offer some protection when stocks are in a state of turmoil and which are doing well even under current circumstances.

One such approach is to focus on high-quality stocks that are also solid dividend payers, such as in the case of WisdomTree’s quality dividend yield series of Exchange Traded Funds. These ETFs pick stocks from developed markets, risk-filtered using a composite risk score screening process based on quality and momentum. To be included in this group companies must meet certain risk management criteria, ESG requirements as well as being highly liquid.

Regional differences

What is interesting about this approach is that the income comes both from the dividend part and the share price. This can insulate investors from several potential problems.

For instance, while the US economy is currently doing better than the European Union (with the first quarter GDP of the former rising by 1.1% and of the latter by only 0.3%) the interest-rate rise triggered turmoil in the banking sector seems to have exposed more cracks in the US where some of the protective banking regulation was dialled back during and after COVID.

“Despite the recent banking turmoil, the global earnings revision ratio continued to show resilience in March. Europe stood out as the only region with more upgrades than downgrades. Europe has clearly gotten off to a strong start and it will be interesting to see if European earnings expectations can hold up as credit conditions deteriorate,” said Aneeka Gupta, Director of Macroeconomic Research at WidsomTree.

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A high quality stock approach

Here is where the high-quality stock approach comes in when choosing stocks for dividend companies.

For instance, among the top ten companies in the WisdomTree Quality Global Dividend Growth UCITS ETF are Microsoft [NYSE:MSFT], Apple NASDAQ:AAPL, luxury goods firm LVMH Moet Hennessy [LVMH], Swiss companies Novartis [NOVN] and Nestle [NESN], pharma-cum-consumer goods firms Johnson& Johnson NYSE:JNJ and Proctor & Gamble NYSE:PG.

These companies are not necessarily the highest dividend payers out there but looking at the combination of their share price and dividend they are performing better than other higher dividend payers. For instance, Apple’s dividend yield is a modest 0.6% but the share price is up 32.5% since the start of the year. Swiss pharma company Novartis is a better dividend payer at 3.45% and its share price is up almost 28% in the last six months.

Similarly, the top ten holdings in WisdomTree’s Eurozone Quality Dividend Growth UCITS ETF include Dutch semiconductor company ASML Holdings [ASML], software expert SAP AG [SAP], L’Oreal [OR], and Schneider Electrics [SU]. While the dividend yields of some of those companies, like ASML, are still a relatively modest 0.38%, most of these stocks are up around 20% in the last six months.

So rather than fleeing the storm completely, a better way of making it through it might be to choose a solid strategy.

Here’s a selection of High Quality Yield ETF ideas