For investors who seek higher dividend yield and lower volatility for better risk-adjusted returns, S&P Dow Jones Indices has proposed a two-step constituent screening method. In this paper, we discuss how this analysis can be applied to Brazilian equity markets using the S&P/B3 Low Volatility High Dividend Index.
- The low volatility screen acts as a quality measure to avoid high-yield stocks with sharp price drops and seeks to capture the low volatility factor for the S&P/B3 Low Volatility High Dividend Index.
- The S&P/B3 Low Volatility High Dividend Index delivered a higher absolute and risk-adjusted return than the benchmark, the S&P Brazil BMI, from May 31, 2007, to March 31, 2020 (see Exhibit 1).
- The index outperformed the S&P Brazil BMI 83% of the time in down markets and underperformed 68% of the time in up markets. However, the outperformance in down markets was more pronounced than the underperformance in up markets.
- Compared with its benchmark, the S&P/B3 Low Volatility High Dividend Index historically delivered higher dividend yield.
Almost one year after launching the S&P/B3 Low Volatility High Dividend Index, we examine the potential advantage of incorporating a low volatility screen into a high-dividend-yield portfolio. We also compare the S&P/B3 Low Volatility High Dividend Index to other S&P Dividend Indices in the Brazilian equity market across various aspects such as sector composition, dividend yield, and historical return, among others.
Historically, the percentage of dividend payers in Brazil has ranged between 71% and 92%, making it a favorable environment for implementing dividend-focused strategies. In Brazil, S&P Dow Jones Indices has three different dividend-focused strategies, using different constructions and targeting different objectives:
- The S&P Dividend Aristocrats® Brasil Index is designed to measure the performance of 30 stocks in the S&P Brazil BMI that maintain increasing or stable dividends.
- The S&P Brazil Dividend Opportunities is designed to measure the performance of 40 of the highest-yielding stocks in the S&P Brazil BMI that demonstrate profitability.
- The S&P/B3 Low Volatility High Dividend Index is designed to measure the performance of the least-volatile stocks among a specified group of high-dividend-yielding constituents of the S&P Brazil BMI that trade on the B3.
The highest-yielding stocks in high-yield strategies often come with greater portfolio volatility, and Brazil is no exception. Therefore, an income strategy may require some form of volatility management for portfolio construction.