Dividend Income ETFs: Exploit the high yield return advantage

Oct 17th, 2011 | By | Category: Equities

High income, with capital growth prospects

Earlier this month the Bank of England announced that it was keeping its benchmark interest rate unchanged at 0.5% for the thirty-first consecutive month. Frozen interest rates near historic lows mean real losses for savers in bank and building society deposits which fail to match inflation.

Dividend Income ETFs - Exploit the high yield return advantage

Analysis by James Montier demonstrates that dividends have been the most significant contributor to equity returns over the long term.

The current weakness in equity markets, however, presents a great opportunity to lock in a high current dividend yield and continue to collect dividends payments as you wait for equities to recover. This opportunity can be accessed cheaply and efficiently via ETFs that track the performance of high-income, dividend-weighted equity indices.

One such ETF is the Amundi ETF FTSE UK Dividend Plus which tracks the performance of the FTSE UK Dividend+ Index. This fund offers a high level of income, coupled with the added prospect of long-term capital appreciation; though it should be stressed that, as with other equity funds, it comes with a higher degree of risk than bank or building society deposits.

The FTSE UK Dividend+ Index is a yield weighted index designed to select and measure the performance of higher yielding stocks within the universe of the FTSE 350 Index, excluding investment trusts. The FTSE UK Dividend+ Index selects the top 50 stocks by one-year forecast dividend yield and weights them within the index according to their dividend yield – as opposed to market capitalisation.

Stocks within the index include blue-chip names such as Aviva, National Grid, Vodafone and Sainsbury (all of which currently yield in excess of 5%), as well as smaller companies such as Leeds-based distributor Premier Farnell and business publisher Reed Elsevier. The key selling point of the fund is that it enables investors to capture the long-term effect of higher compounding dividends, while also benefiting from lower correlations to traditional market cap weighted indices.

The effect of compounding dividends should not be underestimated. Analysis by James Montier, the author of titles such as Value Investing and Behavioural Investing, demonstrates that dividends have been the most significant contributor to equity returns over the long term. On a 5-year time horizon, he shows that dividend yield and dividend growth have typically accounted for almost 80% of the return; over the very long term (1871-2009) they have accounted for some 90% of total return.

But despite such evidence, the importance of dividend payments is frequently overlooked by investors. Analysis from Exchange Data International, a financial data provider, however, reveals the scale of UK dividend payments. They estimate that London-listed companies will pay out a total of £64.2bn in dividends during 2011; £15bn was paid out to shareholders in the first quarter alone.

Emerging market dividend opportunities

According to Montier, the importance of dividends is not just a US or European phenomenon; the same patterns hold true across a wide variety of global equity markets. Indeed, the equity income opportunity is not just limited to developed Western economies. Exciting dividend prospects can now be found in some of the more advanced emerging markets, such as the so-called BRICs (Brazil, Russia, India and China).

The strong economic growth in these countries has been well documented, but their rapid development is such that they now offer investors exposure to well-established, large-cap stocks with attractive dividend yields. Moreover, these companies are often cash rich with low levels of debt.

There are a number of ETFs to play the emerging market dividend theme. One example is the SPDR S&P Emerging Markets Dividend ETF which tracks the S&P Emerging Markets Dividend Opportunities Index. This is designed to provide exposure to high yielding common stocks from emerging markets. The fund’s largest holdings include Eletropaulo Metropolitana of Brazil, Korea Exchange Bank of South Korea and Total Access Communication of Thailand.

UK pensioners to turn to Asia

According to Brian Dennehy of independent financial advisers Dennehy Weller & Co “taking the parochial step to invest solely in UK equity income funds means you miss out on a huge volume of global high yielders”. It is his view that investors will increasingly turn to Asia for dividend growth. Speaking to the Financial Times he predicted that: “By the end of this decade, one of the biggest surprises will be the extent to which UK pensioners rely on Asian companies for a growing income.”

To exploit Asian dividend yield opportunities, investors could consider the iShares DJ Asia/Pacific Select Dividend 30 ETF that aims to track the performance of the Dow Jones Asia/Pacific Select Dividend 30 Index. This offers exposure to the 30 highest dividend-paying stocks from developed countries in Asia/Pacific.

High dividend yield ETFs:

db X- Tracker Stoxx Global Select Dividend 100 ETF

SPDR S&P US Dividend Aristocrats ETF

SPDR S&P Emerging Markets Dividend ETF

iShares DJ Asia/Pacific Select Dividend 30 ETF

db X- Tracker MSCI Ac Asia Ex Japan High Dividend Yield Index ETF

Amundi ETF FTSE UK Dividend Plus

iShares FTSE UK Dividend Plus ETF

Lyxor ETF Euro Stoxx 50 Dividends ETF

db X- Tracker Euro Stoxx® Select Dividend 30 ETF

iShares Euro Stoxx Select Dividend 30 ETF

(Europe domiciled, UK registered)

Tags: , , ,

Comments are closed.