How are dividend indices helping income seekers around the world make more informed decisions? S&P DJI’s Jason Ye joins ausbiz’s Andrew Geoghegan for a closer look at what it takes to be a Dividend Aristocrat and how the S&P World Ex-Australia High Yield Dividend Aristocrats Select Index tracks quality dividend growers.
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Andrew Geoghegan:
Dividend strategies continue to be a powerful tool for income-focused investors, and not just in Australia. Globally, companies with a strong track record of consistent and growing dividends are often seen as more resilient and disciplined. One index that captures this approach is the S&P World Ex-Australia High Yield Dividend Aristocrats Select Index.
Hello, I'm Andrew Geoghegan of ausbiz, and today, we're taking a closer look at how this index works and what it offers investors seeking global income opportunities. And joining me is Jason Ye, Sr. Director of Factors and Dividends Indices at S&P Dow Jones Indices. So, what are Dividend Aristocrats?
Jason Ye:
Dividend Aristocrats refer to a group of companies that have a demonstrated track record of growing dividends consecutively over a long period of time. Taking the S&P 500 Dividend Aristocrats Index, for example, it contains companies that have grown dividends on a year-over-year basis for at least 25 consecutive years. So, this multi-decade dividend growth commitment, it typically shows the robustness of the company's business model, the resilience of their financial performance across different business cycles and the shareholder value generation over the long term.
At S&P Dow Jones Indices, we have offered a global suite of Dividend Aristocrats for more than 20 years. The number of years threshold varies depending on the index coverage, which is to balance the objective of Dividend Aristocrats and diversification considerations.
Andrew Geoghegan:
And, why should Australian investors care about a global dividend index?
Jason Ye:
So, the global dividend index is important for Australian investors to be aware mainly for three reasons. So, first of all, the Australian market has been one of the highest dividend yield markets historically. However, over the past couple of years, the dividend yield level of the S&P/ASX 200 has been trending down. So, some of the equity markets outside of Australia, they're actually offering a higher level of dividend yields during the same period.
Second, diversification of the income. So, if you look at dividend compensation in the developed markets, Australia only accounts for about 5%. So, the top regimes that contribute to the total dividend income in the developed markets are the U.S., Europe and Japan.
Lastly, market participation for the income-focused investors. So, a global dividend index could help market participants understand the potential routes to address some of the exposure toward the underlying market equity beta, which has a relatively low correlation with the Australian market. And, it also can maintain the objective of an income-focused strategy.
Andrew Geoghegan:
Tell us about the newly launched S&P World Ex-Australia High Yield Dividend Aristocrat Select Index. What's the index about?
Jason Ye:
This index begins with the S&P Developed BMI, excluding Korea and Australia, and, then, after some basic size and liquidity screening, we require companies with at least 10 years of growing or maintaining dividends. In addition, we exclude companies with negative or more than a 100% dividend payout ratio. This is to ensure that a company is paying dividends, but not paying out all of its earnings. We also exclude companies with more than a 10% dividend yield.
Now comes the interesting part. So, all of the stocks that pass the screens above, we assign them into one of the three regional groups, and that's based on the company's country of domicile. So, North America, EMEA and APAC, as well as one of the four sector groups, and that's based on the GICS sector classifications.
Group One includes Financials and Real Estate. Group Two includes Consumer Discretionary, Consumer Staples and Health Care. Group Three includes Information Technology and Communication Services. Group Four includes Industrials, Materials, Energy and Utilities.
As a result of this, we formed 12 sub-groups using this regional and sector approach, and, then, within each of the sub-groups, we sort the stocks based on the float market cap times the dividend yield. We select the top 20% stocks to form the final basket, and the constituents are then weighted by the float market cap times the dividend yield, subject to a 6% single-stock capping. Lastly, we re-scale the final basket's regional and sector weights back to the parent, so back to the same as the index starting universe.
Andrew Geoghegan:
Now, this sounds like a quite complex index design. What are some of the rationales behind the approach?
Jason Ye:
Right, this is not the typical dividend index that most of the Australia market participants might be familiar with. There are a few key aspects that we consider when designing this index. The index focuses on the long-term sustainable dividend growth rather than purely selecting the highest dividend yield companies from the global equity markets. Also, I spoke about the merits of the Dividend Aristocrats approach. This is a very different angle from the high dividend yield approach.
The reason why we create these sector and regional groups was to find a more balanced approach in stock selection and constituent weighting. So, you can think of a sector/region-neutral approach. A typical high dividend yield selection would result in a strong overweight toward high-dividend-yield sectors, like Financials, Real Estate, Utilities, and also from the regional perspective, it underweights countries like the U.S., because the U.S. market has a relatively high valuation and low dividend yield. So, by this sector/region group approach, we can select companies with high dividends, but within those groups.
This would lead to less sector/region deviation and also making the index more balanced in sector/regional weights compared to the benchmark, with a lower tracking error too. And, in addition, I introduced the float-market-cap component in the selection and the weighting, and this is also to acknowledge the large-cap companies' contribution in the global pool of the dividends.
Ultimately, the purpose of the index design is to measure the performance of a group of companies with sustainable dividend payments outside of the Australian market while maintaining a relatively low tracking error against underlying broad market performance.
Andrew Geoghegan:
Jason, thanks again for joining us today. To learn more about the S&P World Ex-Australia High Yield Dividend Aristocrats Select Index, please visit the link below.
