Last December, in a prior blog, we introduced the S&P 500^® High Dividend Growth Index, an innovative index that utilizes the S&P Global Dividend Forecasting Dataset to incorporate a forward-looking assessment when selecting constituents. The index is unique since it tracks companies in the S&P 500 that have not only consistently grown their dividends in the past, but also have the highest forecast dividend yield growth.

In this blog we will examine the index's strong performance, with a particular emphasis on the short term given that the index was launched in Q4 2023. Furthermore, since the index's methodology emphasizes a blend between high dividend yield and dividend growth, we will compare those metrics versus the S&P 500, in addition to providing a snapshot of current sector allocations.

Performance Summary

As Exhibit 1 shows, on a YTD and one-year basis, the S&P 500 High Dividend Growth Index has materially outperformed most dividend strategies by posting a 7.06% and 23.37% return over those time periods, respectively. Over the longer term, the index has kept pace with the S&P 500—no easy task as growth stocks have significantly outperformed value and dividend-oriented stocks over this time period.

The strong performance of this index may be attributed to its unique approach to dividend growth. By incorporating analysts' forecasted dividend growth rates (which are partly based on fundamentals growth) in the selection and weighting process, the index may be being boosted by some of the growth factor's strong performance over the short and long term.

Index Characteristics

Exhibit 2 displays the S&P 500 High Dividend Growth Index's trailing 12-month dividend yield since April 2011. Over the full period, the index has averaged a 3% dividend yield, which is over 50% higher than the S&P 500 and S&P 500 Equal Weight Index. As of May 31, 2024, it's trailing 12-month dividend yield was 3.43%, more than double the S&P 500's yield of 1.35% and approximately 14% higher than its long-term average of 3%.

Exhibit 3 displays the annualized dividend growth rate for the respective indices since April 30, 2011. Over this period, the S&P 500 High Dividend Growth Index has grown its dividends by 10.65%, well above the S&P 500's 8.82% dividend growth rate over that time. The combination of high current dividend yield plus high dividend growth is a result of selecting constituents with the highest forecasted dividend yield growth. By selecting based on dividend yield growth as opposed to dividend per share growth, the index has tended to provide a blend of both current yield and future dividend growth.

Exhibit 4 shows the sector weights of the S&P 500 High Dividend Growth Index as of May 31, 2024. Perhaps unsurprisingly for a dividend strategy, the Utilities sector possesses the highest weight at 23.7%, followed by the Financials and Real Estate sectors with 18.0% and 12.9%, respectively. The low weight of the Materials sector is likely due to its growth focus and the sector's tendency to have less growth and more value exposure.

Conclusion

The S&P 500 High Dividend Growth Index has exhibited strong long-term performance and has recently outperformed both high dividend yield and high dividend growth strategies. In addition to strong performance, the index has historically provided a blend of current dividend yield plus dividend growth. The S&P 500 High Dividend Growth Index may serve as a tool to explore the potential applications of a dividend strategy that also incorporates a forward-looking assessment for constituent selection.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

The S&P High Yield Dividend Aristocrats^® tracks companies that have grown their dividends for a period of at least 20 consecutive years, offering equity participation and the potential for enhanced dividend income.

Our recent blog highlights that the dividend growth rate for the S&P High Yield Dividend Aristocrats has exceeded inflation over the long term (2000-2023). In this blog, we extend this analysis to look at how the index has performed across past macroeconomic cycles. Our framework identifies four economic regimes that are determined by the strength and direction of both growth and inflation (see Exhibit 1).

Let's now delve deeper into the performance data by examining the excess returns over the benchmark (S&P Composite 1500^®) as well as the total returns for each type of cyclical outcome (see Exhibits 4 and 5).

Periods of rising growth (as defined in Exhibit 1) have historically been in tandem with strong performance for equity markets (see Exhibit 4), with growth style stocks delivering outperformance. The "Goldilocks Zone"—the period of rising growth and falling inflation—is generally the period with highest excess returns versus the benchmark. However, dividend indices such as the S&P High Yield Dividend Aristocrats have a tilt toward value, and so there is a tendency for the index to underperform the benchmark in this environment. Regardless of the direction of inflationary pressure, in rising growth markets the average monthly S&P High Yield Dividend Aristocrats return has lagged the S&P Composite 1500 benchmark by 0.35%.

In periods of slowing growth when markets are falling, the downside protection characteristics of the S&P High Yield Dividend Aristocrats tend to be favorable. The index methodology encompasses strict dividend qualification criteria, which leads the index to track higher quality companies that may offer resilience at this time.

In a slowing growth but rising inflation backdrop, the S&P High Yield Dividend Aristocrats had a monthly average total return of 0.39%, which is around 120 bps of outperformance. Inflationary environments have historically tended to favor short-duration stocks such as Dividend Aristocrat companies. In slow growth periods where inflation is falling, the S&P High Yield Dividend Aristocrats' performance has been in line with the benchmark.

The S&P High Yield Dividend Aristocrats has historically provided stable consistent long-term dividend growth and robust performance, with enhanced dividend yields. The index has traditionally participated on the upside but has shown defensive positioning in falling markets due to lower volatility.

¹ OECD CLI data https://data.oecd.org/leadind/composite-leading-indicator-cli.htm , OECD CPI data https://data.oecd.org/price/inflation-cpi.htm.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Even though the performance of clean energy-related companies has recently faced some headwinds due to rising interest rates and inflationary pressures, the clean energy industry is still being driven by continuous policy support. As we approach the midpoint of 2024, we wanted to review the S&P Global Clean Energy Index Series rebalance from April and share some of the key developments from the beginning of the year in the clean energy space.

April Rebalance

Launched in 2007, the S&P Global Clean Energy Index has been the benchmark for measuring clean energy-related companies' performance over the past 16 years. In April 2021, we launched the S&P Global Clean Energy Select Index to measure the 30 largest companies in global clean energy businesses that are listed on developed market exchanges.

Both indices went through a semiannual rebalance on April 19, 2024. The index methodology categorizes companies into four exposure score buckets ranging from 0 to 1, with a 0.25 increment, to measure their clean energy business purity. Exhibits 1 and 2 show the change in exposure before and after the April rebalance for both indices. For the S&P Global Clean Energy Index, the weighted average exposure score of the index dropped slightly from 0.95 to 0.93. This drop can be attributed to the addition of certain large market cap companies with an exposure score of 0.75 to the index, such as Iberdrola SA, Consolidated Edison and PT Barito Renewables Energy. As a result, the index weight for companies with an exposure score of 1 decreased. The S&P Global Clean Energy Select Index consists of 30 companies with an exposure score of 1 listed in the developed market exchanges (see Exhibit 2).

S&P Global Clean Energy Index Performance YTD in 2024

Underperforming the S&P Global BMI YTD, the S&P Global Clean Energy Select Index was down 19.96% and the S&P Global Clean Energy Index was down 14.90% in USD total return terms, and dispersion was high among constituents of the S&P Global Clean Energy Index. Sunnova Energy International (-72.39%), Plug Power (-48.67%) and Sunrun (-47.58%) were among the lagging performers, while NHPC (up 50.64%), SJVN (up 48.85%) and Nordex (up 23.41%) made positive contributions to offset some of the losses. It is worth highlighting that NHPC and SJVN, two Indian companies, have outperformed in 2024. This can be attributed to the Indian government's ambitious targets in the clean energy sector.^[1]

Despite the recent performance challenges, the following developments indicate a positive future for the energy transition.

Key Developments

Clean Energy Is Boosting Economic Growth

In March 2024, the International Energy Agency (IEA) released its inaugural Clean Energy Market Monitor report. This report offers a timely and concise overview of clean energy deployment for select technologies. According to the report, "global clean energy deployment scaled new heights in 2023, with annual additions of solar PV and wind growing 85% and 60% respectively."^[2] The adoption of clean energy contributed approximately USD 320 billion to the global economy, representing 10% of the overall growth in global GDP.^[3]

Government Investment in Clean Energy Continues to Increase

In March 2024, the Biden-Harris Administration unveiled a USD 4 billion tax credit initiative supporting more than 100 projects across 35 states. The goal is to boost domestic clean energy manufacturing and curb greenhouse gas emissions in industrial facilities. These projects, eligible for tax credits under the Qualifying Advanced Energy Project Tax Credit (48C), encompass large, medium and small businesses, as well as state and local governments. To qualify for a 30% investment tax credit, all participants must adhere to prevailing wage and apprenticeship requirements.^[4]

DOE Releases Roadmap to Accelerate Interconnection for Clean Energy Transition

The U.S. Department of Energy (DOE) has released the new Transmission Interconnection Roadmap, which proposes solutions to accelerate the integration of a clean energy transition.^[5] The roadmap sets ambitious targets for enhancing interconnection by 2030 and outlines tools to improve the process of connecting clean energy projects to the grid, supporting the Biden-Harris Administration's goal of achieving 100% clean electricity by 2035. "DOE's Grid Deployment Office invests in accelerating interconnection of clean energy generation through the $5 billion Grid Innovation Program, which supports deployment of projects that use innovative approaches to enhance grid resilience and reliability."^[6]

^[1]   https://www.weforum.org/agenda/2024/05/india-emerging-advanced-energy-superpower/

^[2]   https://www.iea.org/reports/clean-energy-market-monitor-march-2024

^[3]   https://www.iea.org/commentaries/clean-energy-is-boosting-economic-growth

^[4]   https://www.energy.gov/articles/biden-harris-administration-announces-4-billion-tax-credits-build-clean-energy-supply

^[5]   https://www.energy.gov/eere/i2x/doe-transmission-interconnection-roadmap-transforming-bulk-transmission-interconnection

^[6]   https://www.energy.gov/articles/doe-releases-first-ever-roadmap-accelerate-connecting-more-clean-energy-projects-nations

The posts on this blog are opinions, not advice. Please read our Disclaimers.

In our previous blog, we introduced the newly launched S&P 500^® Economic Moat Index by reviewing its methodology, index characteristics and historical performance. In this blog, we will examine the specific quantitative metrics used to identify the companies with the widest economic moats. Furthermore, we will discuss the complementary nature of the metrics, which has historically led to strong performance when combining the metrics into a multi-factor score.

Quintile Analysis

In addition to having a solid economic rationale, we believe that metric selection should also be based on empirical research. For Exhibits 2-4, we tested each metric on a standalone basis by dividing S&P 500 constituents into quintiles based on their metric z-score and equal weighting them, with quintiles 1 and 5 being the lowest and highest ranked quintiles, respectively. Exhibit 5 shows the results after combining the three metrics into a multi-factor score. Like the S&P 500 Economic Moat Index, the quintiles are rebalanced semiannually in June and December. Performance is calculated using daily returns from June 21, 2013, to March 31, 2024.

Sustained High Return on Invested Capital

Sustained high return on invested capital (ROIC) is a strong indicator of business quality since it measures how efficiently capital is utilized. This is arguably the strongest single indicator of a moat since companies with wide moats tend to have higher ROIC than those with narrow or no moats.

Exhibit 2 shows that long-term annualized returns steadily increase for each quintile, with quintile 5 providing an annualized return of 14.38% versus 10.56% for quintile 1. Conceptually, this makes sense as companies that can sustainably earn higher ROICs should grow their earnings and intrinsic value at a faster rate over the long term. Moreover, volatility tends to also decrease for higher ranking quintiles, with quintile 5 exhibiting a 15.81% annualized volatility versus 18.51% for quintile 1.

Sustained High Gross Margin

Two metrics are used to assess sustained high gross margin: gross margin over the past 12 months and gross margin stability over the last 5 years. These metrics are used to assess pricing power, i.e. those companies able to charge a premium price over the cost of production, which may indicate the presence of an economic moat.

Like Exhibit 2, Exhibit 3 shows that long-term annualized returns steadily increase based on companies' gross margin. Furthermore, due to volatility diminishing for companies with higher sustained gross margins, the risk-adjusted return significantly improved from 0.48 to 0.91 for quintiles 1 and 5, respectively, representing a substantial 90% improvement.

High Market Share

A high market share may indicate a strong moat resulting from economies of scale, network effects and brand power. This metric is most useful when combined with other metrics since high market share may not indicate high profitability or sustainable competitive advantages. This metric is calculated using Syntax's Market Share Score.

Although Exhibit 4 does not show perfect sequential improvement in quintile performance like Exhibits 2 and 3, the trend remains evident that companies with high market share significantly outperform those with low market share. In addition to posting the highest absolute return of 14.64%, quintile 5 also exhibited the lowest annualized volatility (15.00%), translating to an impressive 0.98 risk-adjusted return.

Complementary Metrics

Although each selection metric shows efficacy on a standalone basis, the metrics may not always accurately identify an economic moat if used in isolation. One way to enhance the effectiveness of identifying an economic moat is to use the three metrics in combination, since it mitigates the risk of distortion when relying on a single indicator. For example, software companies may have high gross margins simply due to their structurally lower cost of goods sold (COGS) and in certain industries such as airlines, high market share has not historically translated to the presence of an economic moat.

Another benefit of using multi-factor selection is strong risk-adjusted performance. As Exhibit 5 shows, quintile 5 provided the highest annualized return and the lowest volatility at 15.43% and 14.48%, respectively. This impressive set of results translates to a risk-adjusted ratio of 1.07. It is quite challenging to achieve a risk-adjusted ratio above 1, and even more uncommon when accompanied by a long-term annualized return in the mid-teens.

Conclusion

Due to the financial reward typically associated with identifying a company with a wide economic moat, there is a great deal of investor attention directed toward this concept. We posit that the strong back-tested performance in this blog supports the notion that financial statement metrics can be used to identify a wide economic moat, and that a purely quantitative approach helps overcome the limitations of a subjective selection process.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Indices that not only track the broad equities market, but also offer the potential for enhanced dividends may appeal to those searching for income within the equity asset class. In this blog, we investigate what the Dow Jones U.S. Select Dividend Index has historically brought to the table, including high dividend income, superior risk-adjusted performance over the long term, strong defensive characteristics in the face of market downturns and its current low valuation metrics versus the benchmark.

For some market participants, the potential for income generation drives a long-term strategic decision; others may have a more tactical view. Historically, in a lower interest rate environment, tactical investors have turned to high dividend yield-focused indices in search of the benefits associated with income-generating assets. The Dow Jones U.S. Select Dividend Index, which celebrated its 20^th anniversary in November last year, is one such index, with a yield that has been significantly higher than the benchmark since 2001 (currently 4.16% versus 1.32%, as of March 28, 2024). Its yield was also high versus other dividend-focused indices in the market, with a yield premium of 30%.¹ During periods of elevated interest rates, fixed income strategies may have had more appeal; however, in the event that interest rates start to fall consistently, equity income products may come into sharper focus.

The Dow Jones U.S. Select Dividend Index has outperformed the benchmark over the long term on an absolute and risk-adjusted basis.

Exhibit 2 shows the long-term performance of the Dow Jones U.S. Select Dividend Index versus the benchmark. Performance has been robust over the full period in both absolute and risk-adjusted terms. In recent years, when the Magnificent 7 (those S&P 500^® mega-cap companies that have been performing strongly in recent periods: Meta Platforms, Amazon, Apple, Netflix, Alphabet, Microsoft and Nvidia) have been so dominant in driving U.S. returns, the Dow Jones U.S. Select Dividend Index has underperformed due to under-representation in the Information Technology sector and especially in these companies.

The Dow Jones U.S. Select Dividend Index outperformed the benchmark during most major market events (except during the height of the Global Financial Crisis and COVID-19 sell-off), demonstrating its defensive characteristics.

The Dow Jones U.S. Select Dividend Index is trading at a significant discount to the benchmark; -33% on a price-to-earnings basis and -58% for the price-to-book and price-to-sales ratios, as of March 28, 2024.

The Dow Jones U.S. Select Dividend Index is currently highly discounted to the benchmark, trading at a 94^th percentile reduction; i.e., versus the benchmark on a composite basis (a simple average of the price-to-book, price-to-earnings and price-to-sales ratio), the discount has only been greater 6% of the time occurring between June and October of 2020. Discounts have been at an elevated level (above 50%) since 2020. However, over the long term (since 2013), the valuation was not always so compelling.

Investors searching for income and equity participation could look to high yield dividend indices to inform strategies geared toward meeting their objectives, especially in markets where interest rates may be falling. Currently, the Dow Jones U.S. Select Dividend Index offers a large yield premium to its benchmark and to other U.S. dividend indices, as well as a significant valuation discount to the benchmark.

¹ 3.30% is the average dividend yield of Morningstar data reflecting global categories of US equity large cap value, US equity large cap blend, US equity mid cap, US equity small cap and US equity large cap growth.

The posts on this blog are opinions, not advice. Please read our Disclaimers.