Income ETFs in focus as global dividends hit record highs

Nov 21st, 2017 | By | Category: Equities

The world’s largest 1,200 companies distributed a third-quarter record of $328.1 billion (£248bn) in dividends, according to research from Janus Henderson, putting a new full-year record for 2017 comfortably within reach. The dividend windfall is likely to enhance the appeal of equity income ETFs to yield-seeking investors.

Income ETFs in focus as global dividends hit record highs

Underlying growth of dividends was 8.4% year-on-year, according to Janus Henderson.

According to the report, the level of global dividends reflects a 14.5% increase in nominal (headline) terms year-over-year, the fastest pace of growth for three years. While higher special dividends boosted headline growth – led by a particularly large payment from China Mobile – underlying growth in dividends was also a robust 8.4%. The growth was also widespread –  every region saw dividends increase in underlying terms (‘underlying dividend growth’ is headline growth adjusted for special dividends, change in currency, timing effects and index changes).

North American headline dividends rose rapidly, up 10.2% to $119.6bn, while underlying growth of 7.5% was the fastest since late 2015. US headline dividends were 9.2% higher at $109.9bn, equivalent to an underlying increase of 7.2%, with every US sector raising payouts. In Canada, growth was faster still, with headline dividends rising to $9.7bn, up 11.0% in underlying terms.

While there are currently no ETFs listed in Europe that provide exposure to broad North American high dividend equities, there are a number that target the US market. One of the largest of these is the PowerShares S&P 500 High Dividend Low Volatility UCITS ETF (HDLV LN) which tracks a dual-factor index composed of stocks from the S&P 500 Index. The S&P 500 is first screened for the 75 highest-yielding stocks before a second screen selects the 50 with the lowest volatility. Constituents are weighted by dividend yield to further enhance the income potential of the ETF. HDLV has assets under management (AUM) of $377 million and a total expense ratio (TER) of 0.30%. Its historic dividend yield is 3.1%.

The iShares MSCI USA Quality Dividend UCITS ETF (QDIV LN) provides a different twist on accessing US dividend payers. The fund targets US firms that have been screened not only for high dividend yields but also for dividend sustainability by choosing firms with strong financial health metrics. The ETF has a slightly higher TER of 0.35%, and has AUM of $395m.

Turning to Europe ex-UK, the Henderson report notes that Q3 saw relatively few dividends paid in Europe, however, improving economic conditions boosted European headline payouts 7.8% to $18.8bn, equivalent to underlying growth of 4.6%. France remained a regional leader in dividend payouts, while Spanish dividend growth noticeably improved.

The largest ETFs listed in Europe that target this market segment are provided by BlackRock and Amundi, with both offering straightforward access to this strategy. The iShares Euro Dividend UCITS ETF (IDVY LN) has just under a billion euros in AUM and a TER of 0.40%. It tracks the Euro Stoxx Select Dividend 30 Index, composed of 30 of the highest dividend payers from eurozone countries.

Alternatively, the Amundi MSCI EMU High Dividend UCITS ETF (CD8D FP) provides a more diversified exposure, covering 70 leading dividend payers from the eurozone. Its has AUM is €58m and a TER of 0.30%.

In the UK, after a challenging year for dividends, underlying dividend growth in Q3 was 17.5%, the highest in the world. A steadier exchange rate helped deliver headline growth of 12.7% – total dividend payments from UK companies reached $29.6bn during the quarter.

The strong growth in UK payouts was boosted by a resurgence in dividends from the mining sector: Rio Tinto and BHP Billiton doubled and tripled their payouts year-on-year respectively, while Anglo American reinstated its dividend six months earlier than expected.

The iShares UK Dividend UCITS ETF (IUKD LN) is one of the largest ETFs in Europe to track UK dividend payers. It currently has AUM of £715m and a TER of 0.40%. IUKD tracks the 50 UK stocks with the highest dividend yield in the FTSE 350 and currently has a distribution yield of 5.1%.

Alternatively, the SPDR S&P UK Dividend Aristocrats UCITS ETF (UKDV LN) has £101m in AUM and a TER of 0.30%. The fund tracks the 30 UK stock with the highest dividend yields from the S&P Europe Broad Market Index that have paid increasing or stable dividends over the previous ten consecutive years. UKDV has a historic yield of 3.9%.

A third option for investors looking to access this segment of the market is the BMO MSCI UK Income Leaders UCITS ETF (ZILK LN) which tracks the performance of just 25 high-quality, high-dividend-yielding stocks from the MSCI UK Index. The fund has AUM of £31m, a TER of 0.35% and a dividend yield of 5.3%.

Investors who appreciate the convenience of accessing all these regions through a single ticker may wish to consider ETFs from Lyxor, Vanguard, or SSGA. The Lyxor SG Global Quality Income UCITS ETF (SGQD LN) tracks an in-house index composed of global companies screened for sustainable dividend payouts. The fund has a TER of 0.45% and AUM of $1.4bn.

The Vanguard FTSE All-World High Dividend Yield UCITS ETF (VHYD LN) provides exposure to high-dividend-paying companies in developed and emerging markets. The fund’s annual charge is relatively low with a TER of 0.29%, and the fund currently has over £590m in AUM.

Investors can also access a global version of SSGA’s ‘dividend aristocrats’ strategy through the SPDR S&P Global Dividend Aristocrats UCITS ETF (GLDV LN). It currently consists of 100 equity holdings with a dividend yield of 4.3%.

The report concludes with Janus Henderson’s forecast for full-year global dividend payments – $1.249 trillion. If realized, this figure would reflect an increase of 7.4% on a headline basis and 7.3% on an underlying basis.

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