INTRODUCTION
Dividend-paying stocks have been in focus over the past decade—many income seekers have turned away from low-yielding fixed income instruments and are looking to equity markets for a more attractive level of income. However, high-yielding companies without strong financial stability may be prone to dividend cuts under the pressure from global economic uncertainties and future rising rates. Thus, an investment strategy searching for high yield should focus on quality as well.
Among different kinds of income-focused equity indices in the market, the Dow Jones Dividend 100 Index Series takes a unique approach. It seeks to track the performance of 100 high-dividend-yielding stocks in each market covered that have a record of consistently paying dividends, selected for solid fundamental strength.
S&P DJI launched the Dow Jones U.S. Dividend 100 Index in 2011. Recently, we expanded the index series to international markets with the launch of the Dow Jones International Dividend 100 Index. This paper investigates the following potential benefits of the Dow Jones Dividend 100 Indices.
- Sustainable dividends with financial quality. The indices not only seek to track stocks with consistent dividend payouts, but they also apply a quality screen for the sustainability of yields. They seek to achieve “quality yields” by requiring stocks to have paid dividends for a minimum of 10 consecutive years, and by ranking stocks by a composite score calculated from the cash-flow-to-total-debt ratio, return on equity (ROE), dividend yield, and five-year dividend growth rate. In addition to the fundamental annual rebalancing, starting from July 2018, S&P DJI introduced a monthly dividend review as an on-going maintenance to ensure dividend sustainability. Every month, stocks that have canceled their dividends will be removed from the indices.
- Dividend growth against future rising rates. A focus on dividend growth in an environment where market participants are concerned about rising rates may be important. Typically, high-yield equity strategies are biased toward rate-sensitive sectors, which tend to pay out higher yields because of the leverage that they can take on (mainly because of mature business models; e.g., Utilities). Such entities are exposed when rates rise. Selection based on dividend growth helps to ensure that firms that can develop their business and increase their payouts are favored in the selection process. Such businesses are often well-managed companies, from both capital structure and operational perspectives.
- Investability. Differentiating the Dow Jones Dividend 100 Indices from other dividend strategies are their strict size and liquidity screens and their weighting method, which is based on a modified market capitalization approach. These attributes were chosen with the goal of increasing index investability in terms of liquidity, capacity, and turnover. Size and liquidity screens could help to reduce the influence of smaller and more distressed stocks on the portfolio, leading to a liquid basket of constituents. A weighting method based on modified market capitalization could not only help maximize the index capacity, but it also has potential to lead to a lower turnover than alternatively weighted income indices, that weight constituents primarily by yield or total dividends.
