Dividend strategies deploy increasingly sophisticated screening methods

With exchange-traded funds linked to dividends seeing big inflows, providers are now offering more targeted exposure to the sector

The popularity of dividend strategies is pushing index and exchange-traded fund (ETF) providers to offer better ways of targeting dividend-paying companies when accessing the sector.

Dividend-based strategies in Europe have attracted roughly €800 million in assets under management (AUM) in the year to date, accounting for around 8% of all inflows, according to Nizam Hamid, London-based head of ETF strategy at Lyxor. “The search for yield has been in high-yield corporate bonds and these dividend indexes,” says Hamid.

A new fund from ETF provider WisdomTree shows just how targeted dividend exposure can be when made through an ETF. The WisdomTree China Dividend ex-Financials, which was listed on Nasdaq on September 19, focuses only on ex-financials Chinese securities.

The best method of selecting dividend-paying stocks is a matter of some debate among industry participants, and some stress the importance of screening companies for quality.

A recent research report from BlackRock argues that “high yielding equities do not equal the highest returns for investors.” The report found that between 1976 and 2012, less than half of stocks yielding more than 10% typically distributed the entire expected dividend. “Many investors focusing only on the highest current yields … are doing so at the expense of quality and may experience lower returns over time,” says BlackRock.

Based on a similar assumption, Société Générale launched the SG Quality Income Index in May, which looks at company balance sheets to find those that are the most financially robust.

Meanwhile, Stoxx has recently expanded its Maximum Dividend index family, which aims simply to maximise the dividend yield of the respective underlying indexes by selecting the 40 companies with the highest expected dividend yield. The Global Maximum Dividend 40, Asia/Pacific Maximum Dividend 40, North America Maximum Dividend 40 and Japan Maximum Dividend 40 indexes all launched last week.

The indexes determine the highest expected dividend yield from the announced and estimated dividend amount, as well as the closing price of the stock at the time of selection. Each stock is then weighted according to the expected dividend yield.

This article first appeared in Structured Products magazine

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