What does it mean when we talk about dividends? When a company pays dividends, it shows that it is generating enough flow and profits, and that it seeks to generate an additional flow to its shareholders.
In May 2016, S&P DJI published a research paper entitled “Exploring Liquidity and Dividends in Peru.”[1] This report identified that Peruvian companies have historically paid dividends: “Over the 10-year period ending Dec. 31, 2015, an average of approximately 70% of the companies in the Peruvian equity market distributed cash dividends annually.”
One way to find out about the possible impact of dividend payments on a portfolio’s performance is through the indices. The performance of an index is calculated using the price movement of its components (price return), and the addition of dividends (total return). The components and their weights are the same but the results are different. In the case of the S&P/BVL Peru Select Index, for example, its YTD performance in Peruvian nuevos soles showed a return of 4.67%, while if we take the same index and incorporate the dividend payments, we see a return of 6.74% YTD (as of July 8, 2017).
On the other hand, there are indices that are created in order to identify companies that pay dividends consistently over a period of time. In Peru, for example, the Lima Stock Exchange (BVL) and S&P DJI recently launched the S&P/BVL Peru Dividend Index on May 25, 2017. The construction of this index started with the S&P/BVL Peru Select Index universe, but it only includes those companies that made dividend payments consistently over the past 12 months as of the rebalancing date, and the weighting of the components was by its dividend rate.[2] The performance of the indices differs; for example, the S&P/BVL Peru Dividend Index registered a total YTD return performance of 17.44%, while the S&P/BVL Peru Select Index was 6.74% (as of July 8, 2017 in nuevos soles terms).
These results, wherein the performance of the dividend index is higher than the broad or benchmark index, are consistent across all markets. Since 1956, dividends have accounted for about one-third of the S&P 500® total return. As a final thought, “dividend indices have historically offered attractive yields and total returns, allowing market participants to participate in up markets while potentially achieving protection in down markets.”[3]
[1] Exploring Liquidity and Dividends in Peru
[2] The dividend rate is calculated based on the dividend paid per share during the preceding twelve months, divided by its price at the rebalancing date
[3] Selecting a Dividend Index? Three Factors Worth Considering.
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