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S&P DJI’s Dividend Indices: The Importance of Incorporating Quality Screens

Aligning Investment Objectives and ESG Values

Durability During Distress - Part 2

The New Purpose of a Corporation; or, What We’ve Known All Along

COVID-19 Revelations – Health (Care) Is Wealth

S&P DJI’s Dividend Indices: The Importance of Incorporating Quality Screens

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Rupert Watts

Senior Director, Strategy Indices

S&P Dow Jones Indices

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Over the last few months, the COVID-19 pandemic has taken its toll on the global economy in a way that no one could have expected. Unsurprisingly, many companies have had to reassess their dividend policy—in many cases resorting to cutting, postponing, or even suspending dividend payments.

Against this background, it is beneficial to review the selection criteria of S&P DJI’s dividend indices. Not only do all of our dividend indices select constituents based on yield, but they also use a quality screen that focuses on their ability to pay dividends in the future. The quality screen varies with each index and is also dependent on the region.

Simply because a company pays a high dividend (whether absolute amount or relative to its price) doesn’t always make it a wise investment. After all, a company paying too much in dividends may be left with little to no reserves in times of market turbulence; as a result, its dividends may be at higher risk for cancellation. Also, a high dividend yield may simply be a result of a decline in the company’s stock price, all else equal. These scenarios are often referred to as being “dividend traps,” and in order to avoid these traps, it is important to incorporate quality screens.

This blog looks at three core dividend series offered by S&P DJI—S&P Dividend Aristocrats®, Dow Jones Select Dividend, and S&P Dividend Opportunities—with respect to their individual screening features to shed more light on the factors that each considers when selecting constituents.

S&P Dividend Aristocrats Indices

The S&P Dividend Aristocrats Indices are well known for their stringent quality screen which is the hallmark of their methodology. This family focuses on stable dividend growth, requiring constituents to have consistently increased dividends every year for a certain period of time that varies by region.

The longest of these is the S&P 500® Dividend Aristocrats, for which constituents must have consistently increased dividends every year for at least 25 years, subject to stock diversification criteria (see Exhibit 1).

Dow Jones Select Dividend Indices

The Dow Jones Select Dividend Indices strive to strike a balance between high yield and dividend sustainability. This index series incorporates stability and quality criteria, which are put in place to avoid dividend traps.

The Dow Jones U.S. Select Dividend Index is designed to measure the performance of 100 high-dividend-paying companies that meet specific criteria, excluding REITs. Exhibit 2 includes more details on the index methodology. The quality screens serve to include companies with a solid track record of dividend payments (I and II), sufficient coverage to sustain its current dividend level (III), and positive earnings (IV).

S&P Dividend Opportunities Indices

The S&P Dividend Opportunities Indices are designed to measure the performance of high-yield common stocks from global markets that meet diversification, stability, and tradability requirements.

The S&P Global Dividend Opportunities Index seeks to track 100 common stocks from around the world that offer high dividend yields. As Exhibit 3 shows, constituents are subject to quality screens in order to include companies with a track record of stable or increasing dividend growth (I), enough cash flow from core operations to support dividends (II), and positive earnings (III).

The recent market volatility underscores the importance of including additional criteria, beyond yield, to select constituents within dividend indices. As illustrated above, the different dividend indices offered by S&P DJI attempt to avoid potential pitfalls of dividend investing by incorporating quality screens.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Aligning Investment Objectives and ESG Values

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S&P DJI’s Mona Naqvi discusses how the S&P 500 ESG Index could help investors maintain their ESG values without sacrificing performance.

Learn more here: https://www.indexologyblog.com/2020/05/06/whos-in-whos-out-walmart-twitter-dropped-from-the-sp-500-esg-index-and-other-major-changes/

The posts on this blog are opinions, not advice. Please read our Disclaimers.

Durability During Distress - Part 2

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Anu Ganti

Senior Director, Index Investment Strategy

S&P Dow Jones Indices

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Dividends play a vital role in many investors’ approach to the market, although there is more than one way to approach dividends. Some investors are most concerned with dividend yield per se, while others are more sensitive to the growth of dividends over time.  Both approaches, of course, can be readily indicized.  Within the U.S. large capitalization universe, the S&P 500 High Dividend Index comprises the highest-yielding companies in the S&P 500.  The S&P 500 Dividend Aristocrats, in contrast, consists of S&P 500 members that have increased their dividends annually for at least 25 years.   Exhibit 1 shows that both strategies have outperformed the S&P 500 over the long term.

In the short run, however, investor attention has turned increasingly to the sustainability of dividends, as more companies continue to cut or suspend their payouts. We previously discussed the tradeoff between the level versus the safety of dividend payments, and illustrated the durability of the S&P High Yield Dividend Aristocrats compared to an equivalent universe of high-payers.  Here we conduct a similar analysis for large-cap Aristocrats, comparing them to the S&P 500 High Dividend Index, and see similar results: The S&P 500 Dividend Aristocrats’ dividends are safer than their high yielding peers.

Source: S&P Dow Jones Indices LLC. Data from December 1991 to April 2020. Index performance based on total return in USD. Past performance is no guarantee of future results. Chart is provided for illustrative purposes.

Exhibit 2 compares the median values of the 500 Dividend Aristocrats and the High Dividend Index on a number of fundamental metrics that measure the strength of companies making dividend payouts.

The S&P 500 Dividend Aristocrats appear stronger across the board. For example:

  • Earnings were almost double last year’s dividend payouts for the Aristocrats, vs. only 1x dividends for the high payers. Cash on hand was also a higher multiple of last year’s dividends.
  • The Aristocrats’ buybacks were more than double those of the high payers, giving them more flexibility during a downturn like the present circumstances.
  • Within large-caps, the Aristocrats are 2 times larger (median capitalization $29 billion) and more profitable (median ROE 18.9%) than their higher-paying counterparts.
Source: S&P Dow Jones Indices LLC, FactSet and S&P Capital IQ. Market cap data as of April 2020, remaining data as of 2019 calendar year-end. Metrics listed include the median levels. Chart is provided for illustrative purposes.

We again caution that while we do not know how many more companies will cut or suspend their dividends or how severe the impact will be, we can conclude that the dividends of large-cap companies with consistent dividend growth are in healthier shape to withstand economic and market declines.

 

 

The posts on this blog are opinions, not advice. Please read our Disclaimers.

The New Purpose of a Corporation; or, What We’ve Known All Along

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Daniel Perrone

Director and Head of Operations, ESG Indices

S&P Dow Jones Indices

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Late last summer, nearly 200 chief executives (S&P Global’s own CEO, Doug Peterson, included) put their signatures on a new statement of the purpose of a corporation,[1] one focused not only on shareholder value, but on value for all key stakeholders. The declaration emphasizes people—employees, customers, and communities—in which employers know they must invest to ensure long-term growth and success. This renewed focus on a company’s contributions to society as a whole is in line with the increased popularity in sustainable investing; one-quarter of all professionally managed assets now incorporate environmental, social, and governance (ESG) considerations.[2]

If this sounds familiar, it’s because Peter Drucker, the management guru whose principles underlie the constituent selection and weighting of the S&P/Drucker Institute Corporate Effectiveness Index, started leading this charge more than 50 years ago. Drucker, whom Businessweek famously called “the man who invented management,” codified the practice of effectiveness: not only doing well, but doing the right things well.

The Drucker Institute has developed a rigorous system to measure how well companies do these right things, including customer satisfaction, employee engagement and development, innovation, and social responsibility. The S&P/Drucker Institute Corporate Effectiveness Index combines these measures with S&P DJI’s quality score—an important piece to the puzzle, because even though the bottom line isn’t the only thing, it is something.

The result is a single holistic measure of a company’s overall management that aims to create value while also managing risk—vital in today’s markets.

Over the one-, three-, and five-year periods ending May 1, 2020, the S&P/Drucker Institute Corporate Effectiveness Index outperformed its benchmark, the S&P 500, by more than 200 bps annually. In fact, the strongest outperformance was over the past 12 months, highlighting the crucial importance of a holistic view of companies and their management. Even more telling are the risk numbers that showcase lower index volatility and higher risk-adjusted returns compared with the S&P 500 over these same periods.

It’s not often that an index matches this kind of outperformance with holistic ESG principles—and a public endorsement of those principles by the companies that the index tracks. The S&P/Drucker Institute Corporate Effectiveness Index could offer relevance for investors who want to do good, performance for investors who want to do well, and effectiveness for investors who want the best of both.

[1]   https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans

[2]   Kell, Georg. “The Remarkable Rise of ESG.” Forbes. July 11, 2018.

The posts on this blog are opinions, not advice. Please read our Disclaimers.

COVID-19 Revelations – Health (Care) Is Wealth

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Koel Ghosh

Head of South Asia

S&P Dow Jones Indices

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In the battle against the COVID-19 pandemic, the importance of healthcare has gained significance. Markets are witnessing new trends across asset classes, while meeting new challenges. Asset-allocation strategies are being reviewed to adjust to the new conditions. Equity sectors are facing the heat of these unprecedented times, but some trends are similar for both global and Indian markets.

The Health Care sector has been one such case. Not only has it outperformed over these past few months of uncertainty, but it also has had a good historical track record. Comparing the Health Care sectors of the Indian and U.S. markets, similar trends of outperformance versus their benchmarks were visible over different time periods. In the U.S. market, the Health Care Select Sector, which consists of all components of the S&P 500® that are classified in the Health Care sector, had a 10-year annualized return of 14.63%, as compared with an 11.69% return from the S&P 500. In Indian markets, the S&P BSE Healthcare had a 10-year annualized return of 11.11%, as compared with a 6.74% return from the S&P BSE SENSEX (as of April 30, 2020). A study on the Australian market and its Health Care sector performance relative to its benchmark showed similar trends (read more here).

A comparison of the Health Care sector performance since January 2020 revealed that the majority of the sectors in the S&P BSE SENSEX, other than Health Care and Telecommunications, underperformed, including the S&P BSE SENSEX itself. The S&P BSE Finance, at -30.01%, and S&P BSE Industrials, at -27.27%, reflected the top sector laggards. The S&P BSE SENSEX, at -18.12%, was well below the S&P BSE Healthcare, which returned 14.32% for the period from Jan. 1, 2020, to April 30, 2020.

Taking an overview of this sector relative to other Indian benchmarks, such as the S&P BSE 100 and S&P BSE 500, further reflected the consistent outperformance of the S&P BSE Healthcare.

Of the 69 constituents in the S&P BSE Healthcare, the top 10 constituents were 65.53% of the total index weight as of April 30, 2020. Sun Pharmaceutical Industries Ltd and Dr. Reddy Laboratories, with index weights of 13.33% and 12.65%, respectively, constituted the top weights in the index.

The posts on this blog are opinions, not advice. Please read our Disclaimers.