How are innovative dividend indices helping market participants make more informed decisions? Look under the hood of the S&P/ASX 200 High Yield Select Index, including how it screens to avoid potential yield traps, with S&P DJI's Jason Ye and ausbiz's Andrew Geoghegan.
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Andrew Geoghegan:
In a market where income remains a key priority for many investors, dividend strategies continue to play a central role. One index that's designed to tap into this demand is the S&P/ASX 200 High Yield Select Index.
Hello, I'm Andrew Geoghegan of ausbiz, and today, we're exploring how this index works and why dividends matter in the Australian market. Joining me is Jason Ye, Senior Director of Factors and Dividends Indices at S&P Dow Jones Indices. Welcome, Jason. Great to have you with us. Why do dividends matter to the Australian market?
Jason Ye:
The Australian equity market is very well known for its high dividend yields and well-cultivated dividend culture here. We see that dividends have become one of the fastest-growing factor strategies in Australia, and there are several reasons why dividends have been traditionally so widely used in the Australian market.
The first reason why dividend is important is that it's an important component of the total returns in the equity space. If we break down the total return of the S&P/ASX 200 historically, the index data shows a large portion of that total return has come from dividend and dividend reinvestment.
The second reason why dividend is important is that it's an alternative source of income from the equity market. Historically, this has been very important in the periods when the fixed income market experienced a low yield regime, but investors have continued to seek income elsewhere. The dividend-imputation system, in addition, also provides some extra income, especially when they're focusing on the high dividend yield companies.
And, the last reason is the historical performance. In the paper we published, we conducted an empirical study, and we found that, if we assign companies in the S&P/ASX 300 into six groups, one for the non-dividend payers and then five quintiles on the low dividend yield to the high dividend yield, the group of stocks with high dividend yield historically outperformed the S&P/ASX 300.
Andrew Geoghegan:
And, Jason, can you walk us through how the S&P/ASX 200 High Yield Select Index is constructed and how it aims to avoid common yield traps?
Jason Ye:
The S&P/ASX 200 High Yield Select Index was launched in October 2024, and it seeks to measure the performance of 50 stocks with high dividend yield from the S&P/ASX 200. It also incorporates several screens to avoid yield traps. Here is how the index is constructed.
Starting with the S&P/ASX 200 universe, excluding all the REITs, we first include stocks with a positive but maximum of 12% estimated dividend yield. Second, we calculate the momentum value of the stocks, and we exclude the companies ranked in the bottom 10% of the momentum value. Third, we select the 75 stocks with the highest 12-month estimated dividend yield, while we're capping the number of stocks from any GICS sector at 15. And, fourth, among the 75 high dividend yield stocks, we exclude the 25 stocks with the highest volatility-adjusted dividend yield. And, lastly, we weight the stocks by the production of the dividend yield and the float market cap, and we apply stocks and sector capping to avoid concentration risk. And, this index is rebalanced semi-annually in January and July.
Andrew Geoghegan:
And, Jason, walk us through the thinking behind the index design.
Jason Ye:
The main consideration around some of this screening is to address the potential yield traps. A yield trap means that a high dividend yield may come from decreasing stock prices or unsustainable dividend payment. The momentum screen could potentially exclude stocks whose high dividend yield is a result of dropping stock prices. And, then, the 12% yield cap basically excludes companies with unreasonably high dividend yield.
And, the risk-adjusted dividend yield is also an innovative design of the index. It will penalize the companies with high dividend yield but, then, with high volatility. So, think of two stocks that have similar levels of dividend yields. The index would be more likely to select the stock with lower return volatility.
And, finally, using the forward-looking estimated dividend matrix, it may help to reflect the latest market expectations on the company's future dividend payment.
Andrew Geoghegan:
What are the key characteristics of the S&P/ASX 200 High Dividend Index?
Jason Ye:
Based on the back-tested data, the S&P/ASX 200 High Dividend Index demonstrated outperformance, higher dividend yield and lower valuation against the broad market benchmark historically. The historical data, in terms of performance, also shows there's some resilience in terms of the characteristics on the performance during the down market, which means that, on average, the S&P/ASX 200 High Yield Select Index tended to perform better than the underlying benchmark when the market was down.
On the sector allocation, the index is more likely to overweight toward sectors with high dividend yield such as Financials, Energy and Materials. And, overall, the S&P/ASX 200 High Yield Select Index is an innovative tool that can help inform market participants seeking income and who are mindful of potential yield traps.
Andrew Geoghegan:
Jason, thanks again for your insights today. To learn more about the S&P/ASX 200 High Yield Select Index and S&P Dow Jones Indices' latest data and research tracking markets across Australia, please visit the link below.
