As the leading dividend index provider, S&P DJI is constantly looking for new approaches and methodologies to bring novel ideas to the market. Our recently launched S&P 500® High Dividend Growth Index is a prime example of this innovative thinking, as it incorporates a forward-looking assessment into its methodology. This index tracks companies in the S&P 500 that have not only offered consistent or growing dividends in the past but also have the highest forecast dividend yield growth. In doing so, constituents are selected based on what dividend they are expected to pay instead of being assessed solely on what they have paid in the past.
In this blog, we will present the index methodology, introduce the S&P Global Dividend Forecasting Dataset and review the index’s risk/performance profile.
To be eligible for selection, constituents must have maintained or grown their historic dividends for 5 consecutive years and must also be projected to do so over the next 12 months.
From this pool of eligible stocks, the top 100 constituents with the highest forecast dividend growth scores are selected. The score is computed as the 12-month forecast yield minus the 12-month historical yield.
Finally, the index constituents are weighted by forecast dividend yield with constraints placed on individual stocks and GICS® sectors.1 To reduce turnover, the index uses a 20% buffer.
Dividend Forecasting Data
The Dividend Forecast Dataset is sourced from S&P Global Market Intelligence, which is another division within S&P Global. This team has more than 40 professionals performing fundamental analysis with the goal of delivering precise forecasts of the size and timing of dividend payments. They serve over 150 customers across the world, including most of the top-tier global banks.2
The performance statistics that follow are calculated starting in 2010, when the data for the dividend forecasting dataset began. Hence, the back-tested data incorporates forecasts that were stored as and when they were made, with no look-ahead bias.
While this period has been a strong performance period for the S&P 500, the S&P 500 High Dividend Growth Index has more than kept pace. Since 2010, it has had an annualized return of 11.94% while delivering a significantly higher yield.
Downside Protection and Upside Participation
The historical capture ratios versus the S&P 500 show that the S&P 500 High Dividend Growth Index has exhibited moderately defensive characteristics (94.5% downside capture). Moreover, on average, the index has historically participated in 96% of the market return in up-market periods.3 This is higher than most dividend strategies and is likely a result of its relatively lower value tilt and higher growth tilt.
Historical Yield and Dividend Growth Analysis
This innovative methodology offers a unique blend of dividend growth and high yield. Since 2010, the index has had an average yield of over 3%, comfortably outperforming its benchmark and other strategies within the dividend growth category.
Impressively, for a dividend strategy offering a high yield, the index also has a high annualized dividend growth rate. From 2010 to 2022, the S&P 500 High Dividend Growth Index grew its dividend at an annual rate of 13.8% (see Exhibit 3). This outpaces the long-term U.S. inflation rate, even with the recent spike in inflation over the last few years.
Exhibit 4 shows the factor exposure difference between the S&P 500 High Dividend Growth Index and S&P 500 High Dividend Index in terms of Axioma Risk Model Factor Z-scores. The S&P 500 High Dividend Growth Index demonstrated less value tilt and had lower dividend yield than the S&P 500 High Dividend Index.
From a sector perspective, the S&P 500 High Dividend Growth Index had lower sector weights in Utilities (-11.5%) and Real Estate (-5.8%), while having higher sector weights in Industrials (9.6%) and Information Technology (6.3%) than the S&P 500 High Dividend Index (see Exhibit 5).
In a market full of passive dividend solutions, the S&P 500 High Dividend Growth Index stands out by utilizing a forward-looking approach while historically offering high dividend growth and high yield. This index’s historical lower value tilt and higher growth tilt may help to avoid sacrificing potential upside when seeking high yield.
1 For further information about the index design, please see the S&P 500 High Dividend Growth Index Methodology.
2 For more information, please see this link.
3 The market is defined as the monthly performance of S&P 500 benchmarks from April 16, 2010, to Oct. 31, 2023.The posts on this blog are opinions, not advice. Please read our Disclaimers.