Description
STRATEGY 101 | U.S.
The Importance of Dividends
CONTRIBUTORS
Vinit Srivastava
Senior Director
Strategy Indices
vinit.srivastava@spdji.com
Jane Kim
Associate Director
Strategy Indices
jane.kim@spdji.com
The percentage of dividends as a part of personal income has steadily
increased over time, making dividends an important source of income.
Dividend income has climbed from 2.85% in 1981 to 5.89% in 2014, whereas
interest income has declined from 13.5% to 8.6% over the same period (see
Exhibit 1).
Exhibit 1: Dividends and Interest as Percent of Personal Income
18%
16%
14%
12%
10%
8%
6%
4%
Since 1956,
dividends have
accounted for
approximately onethird of the total
equity return of the
S&P 500, with
capital appreciation
making up the other
two-thirds.
2%
0%
Dividend Income (Percent of Personal Income)
Interest Income (Percent of Personal Income)
Source: Bureau of Economic Analysis. National Income Product Accounts. Data as of Dec. 31, 2014.
Past performance is no guarantee of future results. Chart is provided for illustrative purposes. Since 1956, dividends have accounted for approximately one-third of the total equity return of the S&P 500®, with capital appreciation making up the other two-thirds. Today, most market participants know that both sustainable dividend income and the potential for capital appreciation form total return expectations.
Exhibits 2 and 3 illustrate the historical importance of dividends. . The Importance of Dividends October 2015 Exhibit 2: Percentage of Annualized Total Returns of the S&P 500 From Dividends Contribution of Dividends to Total Return of the S&P 500 160% 140% 120% 100% 80% 60% 40% 20% 0% 1940s 1960s 1970s 1980s 1990s 2000s 1936-2014 Exhibit 3: Dividends and the Compounding Effect 10000.0 USD 2,648.69 1000.0 USD 132.19 100.0 USD Today, most market participants know that both sustainable dividend income and the potential for capital appreciation form total return expectations. 1950s Source: S&P Dow Jones Indices LLC. Data as of Aug. 31, 2015. Past performance is no guarantee of future results.
Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. 10.0 1.0 0.1 S&P 500 (TR) S&P 500 Ratio Source: S&P Dow Jones Indices LLC. Data as of Aug.
31, 2015. Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance.
Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. 2 . The Importance of Dividends October 2015 INDEX DESIGN AND CONSTRUCTION The S&P 500 High Dividend Index aims to provide exposure to the highest quintile of dividend-paying stocks in the S&P 500. The constituents of S&P 500 High Dividend Index must be members of the S&P 500 and have an indicated dividend yield as of the rebalancing reference date. The index ranks in descending order the indicated dividend yield and selects the top 80 equally weighted by 1/(n=80). The index is rebalanced semiannually in January and July. Exhibit 4: S&P 500 High Dividend Index Characteristics Number of Constituents 80 Weight Largest Constituents (%) 1.7 Weight Top 10 Constituents (%) 14.2 Constituent Market Cap (USD Million) Mean Total Market Cap 37,284.9 Largest Total Market Cap 254,631.9 Smallest Total Market Cap 4,008.1 Median Total Market Cap 17,434.0 Source: S&P Dow Jones Indices LLC. Data as of Aug.
31, 2015. Table is provided for illustrative purposes. In the large-cap U.S. equity space, we find that over the past 24 years, firms that have paid high dividends relative to their peers have outperformed the broader market. INDEX CHARACTERISTICS In the large-cap U.S. equity space, we find that over the past 24 years, firms that have paid high dividends relative to their peers have outperformed the broader market (see Exhibits 5 and 6).
Such outperformance comes at a slightly higher volatility over the total time period and higher drawdowns. This can be expected, as there is no filter on the quality of the dividend payments, but only on the magnitude of the payments relative to the price (dividend yield). Exhibit 5: Comparing Wealth Curves 2000 1800 1600 1400 1200 1000 800 600 400 200 0 S&P 500 High Dividend Index (TR) S&P 500 (TR) Source: S&P Dow Jones Indices LLC. Data as of Aug.
31, 2015. Index performance based on total return in USD. Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance.
Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. 3 . The Importance of Dividends October 2015 Exhibit 6: Comparing Wealth Curves January 31, 1991 = 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 The yield of the S&P 500 High Dividend Index is on average 200-300 bps higher than the S&P 500. 0.4 S&P 500 High Dividend Index/S&P 500 Source: S&P Dow Jones Indices LLC. Data as of Aug. 31, 2015. Index performance based on total return in USD. Past performance is no guarantee of future results.
Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. As could be expected, the yield of the S&P 500 High Dividend Index is on average 200-300 bps higher than the S&P 500 (see Exhibit 7). Exhibit 7: Risk/Return Profiles Annual Return (%) S&P 500 High Dividend Index (TR) S&P 500 (TR) Past 1 Year 0.25 0.48 Past 3 Years 14.30 14.31 Past 5 Years 15.46 15.87 Past 7 Years 10.34 8.69 Past 10 Years 21.84 17.71 5.11 5.80 Annual Volatility (%) Past 1 Year Past 3 Years 9.75 9.56 Past 5 Years 10.01 11.91 Past 7 Years 20.53 16.53 Past 10 Years 16.74 15.25 Past 1 Year 0.05 0.08 Past 3 Years 1.47 1.50 Past 5 Years 1.54 1.33 Past 7 Years 0.50 0.53 Past 10 Years 1.30 1.16 -7.31 -6.03 Past 5 Years -8.94 -16.26 Past 7 Years -52.38 -36.13 Past 10 Years -0.66 -0.51 Annualized Risk-Adjusted Return Maximum Drawdown (%) Past 3 Years Source: S&P Dow Jones Indices LLC. Data as of Aug.
31, 2015. Index performance based on total return in USD. Past performance is no guarantee of future results. It is not possible to invest directly in an index, and index returns do not reflect expenses an investor would pay.
Table is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. 4 . The Importance of Dividends October 2015 Exhibit 8: S&P 500 and S&P 500 High Dividend Index Historical Yield 14 12 S&P 500 High Dividend Index Dividend Yield 10 S&P 500 Dividend Yield 8 6 4 2 0 Source: S&P Dow Jones Indices LLC. Monthly dividend yield data from Jan. 2, 2004, to Aug. 31, 2015.
Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. In times when interest rates are low, investors tend to seek places where they can receive a higher yield for their investment. In times when interest rates are low, investors tend to seek places where they can receive a higher yield for their investment.
Exhibit 8 shows that as of Aug. 31, 2015, the S&P 500 High Dividend Index delivered the highest yield, at 4.33%. The current low interest rate environment has made dividend investing a compelling strategy.
Currently, the yield on the six-month U.S. Treasury Bill is the lowest among the instruments observed. Recently, equity- and dividend-based strategies have been offering higher yields compared with many traditional fixed income options that are available to income-seeking investors. Exhibit 9 compares the current yields on the short-term fixed income instruments with equities and a portfolio of highdividend-paying securities. Exhibit 9: Yield Comparison 5.00% 4.33% 4.50% 4.00% 3.50% 3.00% 2.20% 2.50% 2.14% 2.00% 1.50% 1.00% 0.50% 0.23% 0.00% Six-Month U.S. Treasury Bill S&P U.S.
Aggregate Bond Index S&P 500 High Dividend Index S&P 500 Source: S&P Dow Jones Indices LLC. Data as of Aug. 31, 2015.
Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. 5 .
The Importance of Dividends October 2015 TURNOVER To reduce turnover, there is a 20% buffer rule based on the indicated dividend yield at each rebalancing. Exhibit 10 illustrates a one-way turnover, with an average turnover rate of about 37.4%. The highest turnover rates occurred during recessions, including from 1998 to 2001 and again from 2008 to 2011. The highest turnovers occurred during January and July, as these are the rebalancing dates. Exhibit 10: S&P 500 High Dividend Index Total Turnover Since the index is based on dividend yield, it is highly concentrated in the utilities and financials sectors. 70% Average = 37.4% 60% 50% 40% 30% 20% 10% 0% Source: S&P Dow Jones Indices LLC. Annual turnover data from Feb.
1, 1991, to Aug. 31, 2015. Past performance is no guarantee of future results.
Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. Since the index is based on dividend yield, it is highly concentrated in the utilities and financials sectors, which can be expected (see Exhibit 11). Despite the recession from 2008-2009, exposure to financials remained high during this period, as the sector had transitioned from diversified banks in the early 1990s to regional banks and specialized REITs. Sector exposure may affect the index when interest rates rise.
Typically, when interest rates rise, defensive sectors such as utilities tend to be more heavily affected. 6 . The Importance of Dividends October 2015 Exhibit 11: Sector Allocation of the S&P 500 High Dividend Index 100% 90% Utilities 80% Telecommunication Services Technology 70% Materials 60% 50% Information Technology Industrials 40% Health Care 30% 20% 10% 0% As we go from the S&P 500 Dividend Aristocrats (which employs a stringent dividend growth screen) to the S&P 500 High Dividend Index, which doesn’t employ a quality screen, yields and volatility get higher, as would be expected. Financials Energy Consumer Staples Consumer Discretionary Source: S&P Dow Jones Indices LLC. Data from Jan. 31, 1991, to Aug. 31, 2015.
Chart is provided for illustrative purposes. Exhibit 12: Sector Allocation of the S&P 500 100.00% 90.00% 80.00% 70.00% 60.00% Utilities Telecommunication Services Materials Information Technology Industrials 50.00% Health Care 40.00% Financials 30.00% Energy 20.00% Consumer Staples 10.00% 0.00% Consumer Discretionary Source: S&P Dow Jones Indices LLC. Data from Jan. 31, 1991, to Aug.
31, 2015. Chart is provided for illustrative purposes. 7 . The Importance of Dividends October 2015 Since Jan. 31, 1991, sector exposures for the S&P 500 have remained relatively stable over time and through various economic cycles (see Exhibit 12). The index has consistently shown large concentrations in financials and information technology. This is in contrast with the S&P 500 High Dividend Index, for which sector exposures have changed more dynamically and have been heavily concentrated in financials and utilities.
Since the S&P 500 does not have a dividend yield requirement, there is broader sector representation in comparison to the S&P 500 High Dividend Index. FUNDAMENTAL DATA COMPARISON The performance of high-yielding stocks in the S&P 500 High Dividend Index is further illustrated in Exhibits 13 and 14 in the breakdown of fundamentals. The biggest gap is evident in the price-to-cash-flow ratio, marking a difference of approximately 14% between the two indices. Large, highyielding U.S. stocks also have stronger earnings, as illustrated by the higher price-to-earnings ratios (P/E; trailing and forward) in comparison with its benchmark (see Exhibit 13).
Since 2009, the P/E of the S&P 500 High Dividend Index has been on average 1.2 times higher than that of S&P 500. Furthermore, the constituents of the S&P 500 High Dividend Index tend to have higher cash flow, enabling them to pay out higher in comparison to the S&P 500 (see Exhibit 14). Exhibit 13: P/E Ratios 35.0000 30.0000 25.0000 P/E Trailing S&P 500 High Dividend Index 20.0000 15.0000 P/E Trailing S&P 500 10.0000 5.0000 0.0000 December 2009 March 2010 June 2010 September 2010 December 2010 March 2011 June 2011 September 2011 December 2011 March 2012 June 2012 September 2012 December 2012 March 2013 June 2013 September 2013 December 2013 March 2014 June 2014 September 2014 December 2014 March 2015 June 2015 Since 2009, the P/E of the S&P 500 High Dividend Index has been on average 1.2 times higher than that of S&P 500. Source: S&P Dow Jones Indices LLC. Chart is provided for illustrative purposes. 8 . The Importance of Dividends October 2015 Exhibit 14: Price/Cash Flow Ratios 35.0000 30.0000 25.0000 Price/Cash Flow S&P 500 High Dividend Index 20.0000 15.0000 10.0000 Price/Cash Flow S&P 500 5.0000 April 2015 December 2014 April 2014 August 2014 August 2013 December 2013 April 2013 December 2012 April 2012 August 2012 August 2011 December 2011 April 2011 December 2010 April 2010 August 2010 0.0000 December 2009 The constituents of the S&P 500 High Dividend Index tend to have higher cash flow, enabling them to pay out higher in comparison to the S&P 500. Source: S&P Dow Jones Indices LLC. Chart is provided for illustrative purposes. COMPARISON OF S&P 500 HIGH DIVIDEND INDEX VERSUS OTHER S&P 500 DIVIDEND INDICES Exhibit 15 reflects the differences in the index construction of three different S&P ® 500-based dividend strategies: the S&P 500 Dividend Aristocrats , the S&P 500 Low Volatility High Dividend Index, and the S&P 500 High Dividend Index. As we go from the S&P 500 Dividend Aristocrats (which employs a stringent dividend growth screen) to the S&P 500 High Dividend Index (which doesn’t employ a quality screen), yields and volatility get higher, as would be expected. 9 . The Importance of Dividends The S&P 500 High Dividend Index is more of a pure-yieldpursuit strategy, catered toward investors who are seeking current income. October 2015 Exhibit 15. S&P 500 Dividend Indices Comparison S&P 500 High Category Dividend S&P 500 Dividend Aristocrats® Index Index S&P 500 S&P 500 Universe Securities with increased dividends Top 80% of every year for at least 25 years while Constituent highest-yielding meeting minimum float-adjusted Selection securities from market cap and liquidity requirements the S&P 500 selected from the S&P 500 Current Constituent Floating–80 Floating–52 (minimum 40) Number Equally Weighting Equally weighted weighted Sector Weight 30 30 Cap (%) Semiannual Reconstituted annually in January; Review (January and reweighted quarterly (April, July, Frequency July) October) 10-Year Annualized 21.84 10.17 Return (%) 10-Year Annualized 16.74 13.76 Risk (%) Current Yield 4.33 2.47 (%) Base Date Jan. 18, 1991 Dec. 31, 1989 S&P 500 Low Volatility High Dividend Index S&P 500 50 least-volatile names from the top 75 highestyielding securities from the S&P 500 Fixed–50 Historical annual dividend yield 25 Semiannual (January and July) 10.91 13.58 4.12 Jan.
31, 1990 Source: S&P Dow Jones Indices LLC. Data as of Aug. 31, 2015.
Index performance based on total return in USD. Past performance is no guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. CONCLUSION The S&P 500 High Dividend Index is more of a pure-yield-pursuit strategy, catered toward investors who are seeking current income.
As we have seen, the index does exhibit slightly higher volatility than the benchmark S&P 500, but it has a current yield that is an average of 200-300 bps higher than that of the S&P 500. Income-seeking investors could employ this strategy in conjunction with other quintile-based S&P 500 factor strategies, based on their investment objective. LIKE WHAT YOU READ? Sign up to receive updates on a broad range of index-related topics and complimentary events. 10 . The Importance of Dividends October 2015 PERFORMANCE DISCLOSURES The S&P 500 High Dividend Index was launched on September 21, 2015. The S&P 500 was launched on March 4, 1957. All information for an index prior to the launch date is back-tested. However, it should be noted that the historic calculations of an Economic Index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
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Past performance is no guarantee of future results. Chart is provided for illustrative purposes. Since 1956, dividends have accounted for approximately one-third of the total equity return of the S&P 500®, with capital appreciation making up the other two-thirds. Today, most market participants know that both sustainable dividend income and the potential for capital appreciation form total return expectations.
Exhibits 2 and 3 illustrate the historical importance of dividends. . The Importance of Dividends October 2015 Exhibit 2: Percentage of Annualized Total Returns of the S&P 500 From Dividends Contribution of Dividends to Total Return of the S&P 500 160% 140% 120% 100% 80% 60% 40% 20% 0% 1940s 1960s 1970s 1980s 1990s 2000s 1936-2014 Exhibit 3: Dividends and the Compounding Effect 10000.0 USD 2,648.69 1000.0 USD 132.19 100.0 USD Today, most market participants know that both sustainable dividend income and the potential for capital appreciation form total return expectations. 1950s Source: S&P Dow Jones Indices LLC. Data as of Aug. 31, 2015. Past performance is no guarantee of future results.
Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. 10.0 1.0 0.1 S&P 500 (TR) S&P 500 Ratio Source: S&P Dow Jones Indices LLC. Data as of Aug.
31, 2015. Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance.
Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. 2 . The Importance of Dividends October 2015 INDEX DESIGN AND CONSTRUCTION The S&P 500 High Dividend Index aims to provide exposure to the highest quintile of dividend-paying stocks in the S&P 500. The constituents of S&P 500 High Dividend Index must be members of the S&P 500 and have an indicated dividend yield as of the rebalancing reference date. The index ranks in descending order the indicated dividend yield and selects the top 80 equally weighted by 1/(n=80). The index is rebalanced semiannually in January and July. Exhibit 4: S&P 500 High Dividend Index Characteristics Number of Constituents 80 Weight Largest Constituents (%) 1.7 Weight Top 10 Constituents (%) 14.2 Constituent Market Cap (USD Million) Mean Total Market Cap 37,284.9 Largest Total Market Cap 254,631.9 Smallest Total Market Cap 4,008.1 Median Total Market Cap 17,434.0 Source: S&P Dow Jones Indices LLC. Data as of Aug.
31, 2015. Table is provided for illustrative purposes. In the large-cap U.S. equity space, we find that over the past 24 years, firms that have paid high dividends relative to their peers have outperformed the broader market. INDEX CHARACTERISTICS In the large-cap U.S. equity space, we find that over the past 24 years, firms that have paid high dividends relative to their peers have outperformed the broader market (see Exhibits 5 and 6).
Such outperformance comes at a slightly higher volatility over the total time period and higher drawdowns. This can be expected, as there is no filter on the quality of the dividend payments, but only on the magnitude of the payments relative to the price (dividend yield). Exhibit 5: Comparing Wealth Curves 2000 1800 1600 1400 1200 1000 800 600 400 200 0 S&P 500 High Dividend Index (TR) S&P 500 (TR) Source: S&P Dow Jones Indices LLC. Data as of Aug.
31, 2015. Index performance based on total return in USD. Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance.
Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. 3 . The Importance of Dividends October 2015 Exhibit 6: Comparing Wealth Curves January 31, 1991 = 2.0 1.8 1.6 1.4 1.2 1.0 0.8 0.6 The yield of the S&P 500 High Dividend Index is on average 200-300 bps higher than the S&P 500. 0.4 S&P 500 High Dividend Index/S&P 500 Source: S&P Dow Jones Indices LLC. Data as of Aug. 31, 2015. Index performance based on total return in USD. Past performance is no guarantee of future results.
Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. As could be expected, the yield of the S&P 500 High Dividend Index is on average 200-300 bps higher than the S&P 500 (see Exhibit 7). Exhibit 7: Risk/Return Profiles Annual Return (%) S&P 500 High Dividend Index (TR) S&P 500 (TR) Past 1 Year 0.25 0.48 Past 3 Years 14.30 14.31 Past 5 Years 15.46 15.87 Past 7 Years 10.34 8.69 Past 10 Years 21.84 17.71 5.11 5.80 Annual Volatility (%) Past 1 Year Past 3 Years 9.75 9.56 Past 5 Years 10.01 11.91 Past 7 Years 20.53 16.53 Past 10 Years 16.74 15.25 Past 1 Year 0.05 0.08 Past 3 Years 1.47 1.50 Past 5 Years 1.54 1.33 Past 7 Years 0.50 0.53 Past 10 Years 1.30 1.16 -7.31 -6.03 Past 5 Years -8.94 -16.26 Past 7 Years -52.38 -36.13 Past 10 Years -0.66 -0.51 Annualized Risk-Adjusted Return Maximum Drawdown (%) Past 3 Years Source: S&P Dow Jones Indices LLC. Data as of Aug.
31, 2015. Index performance based on total return in USD. Past performance is no guarantee of future results. It is not possible to invest directly in an index, and index returns do not reflect expenses an investor would pay.
Table is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. 4 . The Importance of Dividends October 2015 Exhibit 8: S&P 500 and S&P 500 High Dividend Index Historical Yield 14 12 S&P 500 High Dividend Index Dividend Yield 10 S&P 500 Dividend Yield 8 6 4 2 0 Source: S&P Dow Jones Indices LLC. Monthly dividend yield data from Jan. 2, 2004, to Aug. 31, 2015.
Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. In times when interest rates are low, investors tend to seek places where they can receive a higher yield for their investment. In times when interest rates are low, investors tend to seek places where they can receive a higher yield for their investment.
Exhibit 8 shows that as of Aug. 31, 2015, the S&P 500 High Dividend Index delivered the highest yield, at 4.33%. The current low interest rate environment has made dividend investing a compelling strategy.
Currently, the yield on the six-month U.S. Treasury Bill is the lowest among the instruments observed. Recently, equity- and dividend-based strategies have been offering higher yields compared with many traditional fixed income options that are available to income-seeking investors. Exhibit 9 compares the current yields on the short-term fixed income instruments with equities and a portfolio of highdividend-paying securities. Exhibit 9: Yield Comparison 5.00% 4.33% 4.50% 4.00% 3.50% 3.00% 2.20% 2.50% 2.14% 2.00% 1.50% 1.00% 0.50% 0.23% 0.00% Six-Month U.S. Treasury Bill S&P U.S.
Aggregate Bond Index S&P 500 High Dividend Index S&P 500 Source: S&P Dow Jones Indices LLC. Data as of Aug. 31, 2015.
Past performance is no guarantee of future results. Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. 5 .
The Importance of Dividends October 2015 TURNOVER To reduce turnover, there is a 20% buffer rule based on the indicated dividend yield at each rebalancing. Exhibit 10 illustrates a one-way turnover, with an average turnover rate of about 37.4%. The highest turnover rates occurred during recessions, including from 1998 to 2001 and again from 2008 to 2011. The highest turnovers occurred during January and July, as these are the rebalancing dates. Exhibit 10: S&P 500 High Dividend Index Total Turnover Since the index is based on dividend yield, it is highly concentrated in the utilities and financials sectors. 70% Average = 37.4% 60% 50% 40% 30% 20% 10% 0% Source: S&P Dow Jones Indices LLC. Annual turnover data from Feb.
1, 1991, to Aug. 31, 2015. Past performance is no guarantee of future results.
Chart is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. Since the index is based on dividend yield, it is highly concentrated in the utilities and financials sectors, which can be expected (see Exhibit 11). Despite the recession from 2008-2009, exposure to financials remained high during this period, as the sector had transitioned from diversified banks in the early 1990s to regional banks and specialized REITs. Sector exposure may affect the index when interest rates rise.
Typically, when interest rates rise, defensive sectors such as utilities tend to be more heavily affected. 6 . The Importance of Dividends October 2015 Exhibit 11: Sector Allocation of the S&P 500 High Dividend Index 100% 90% Utilities 80% Telecommunication Services Technology 70% Materials 60% 50% Information Technology Industrials 40% Health Care 30% 20% 10% 0% As we go from the S&P 500 Dividend Aristocrats (which employs a stringent dividend growth screen) to the S&P 500 High Dividend Index, which doesn’t employ a quality screen, yields and volatility get higher, as would be expected. Financials Energy Consumer Staples Consumer Discretionary Source: S&P Dow Jones Indices LLC. Data from Jan. 31, 1991, to Aug. 31, 2015.
Chart is provided for illustrative purposes. Exhibit 12: Sector Allocation of the S&P 500 100.00% 90.00% 80.00% 70.00% 60.00% Utilities Telecommunication Services Materials Information Technology Industrials 50.00% Health Care 40.00% Financials 30.00% Energy 20.00% Consumer Staples 10.00% 0.00% Consumer Discretionary Source: S&P Dow Jones Indices LLC. Data from Jan. 31, 1991, to Aug.
31, 2015. Chart is provided for illustrative purposes. 7 . The Importance of Dividends October 2015 Since Jan. 31, 1991, sector exposures for the S&P 500 have remained relatively stable over time and through various economic cycles (see Exhibit 12). The index has consistently shown large concentrations in financials and information technology. This is in contrast with the S&P 500 High Dividend Index, for which sector exposures have changed more dynamically and have been heavily concentrated in financials and utilities.
Since the S&P 500 does not have a dividend yield requirement, there is broader sector representation in comparison to the S&P 500 High Dividend Index. FUNDAMENTAL DATA COMPARISON The performance of high-yielding stocks in the S&P 500 High Dividend Index is further illustrated in Exhibits 13 and 14 in the breakdown of fundamentals. The biggest gap is evident in the price-to-cash-flow ratio, marking a difference of approximately 14% between the two indices. Large, highyielding U.S. stocks also have stronger earnings, as illustrated by the higher price-to-earnings ratios (P/E; trailing and forward) in comparison with its benchmark (see Exhibit 13).
Since 2009, the P/E of the S&P 500 High Dividend Index has been on average 1.2 times higher than that of S&P 500. Furthermore, the constituents of the S&P 500 High Dividend Index tend to have higher cash flow, enabling them to pay out higher in comparison to the S&P 500 (see Exhibit 14). Exhibit 13: P/E Ratios 35.0000 30.0000 25.0000 P/E Trailing S&P 500 High Dividend Index 20.0000 15.0000 P/E Trailing S&P 500 10.0000 5.0000 0.0000 December 2009 March 2010 June 2010 September 2010 December 2010 March 2011 June 2011 September 2011 December 2011 March 2012 June 2012 September 2012 December 2012 March 2013 June 2013 September 2013 December 2013 March 2014 June 2014 September 2014 December 2014 March 2015 June 2015 Since 2009, the P/E of the S&P 500 High Dividend Index has been on average 1.2 times higher than that of S&P 500. Source: S&P Dow Jones Indices LLC. Chart is provided for illustrative purposes. 8 . The Importance of Dividends October 2015 Exhibit 14: Price/Cash Flow Ratios 35.0000 30.0000 25.0000 Price/Cash Flow S&P 500 High Dividend Index 20.0000 15.0000 10.0000 Price/Cash Flow S&P 500 5.0000 April 2015 December 2014 April 2014 August 2014 August 2013 December 2013 April 2013 December 2012 April 2012 August 2012 August 2011 December 2011 April 2011 December 2010 April 2010 August 2010 0.0000 December 2009 The constituents of the S&P 500 High Dividend Index tend to have higher cash flow, enabling them to pay out higher in comparison to the S&P 500. Source: S&P Dow Jones Indices LLC. Chart is provided for illustrative purposes. COMPARISON OF S&P 500 HIGH DIVIDEND INDEX VERSUS OTHER S&P 500 DIVIDEND INDICES Exhibit 15 reflects the differences in the index construction of three different S&P ® 500-based dividend strategies: the S&P 500 Dividend Aristocrats , the S&P 500 Low Volatility High Dividend Index, and the S&P 500 High Dividend Index. As we go from the S&P 500 Dividend Aristocrats (which employs a stringent dividend growth screen) to the S&P 500 High Dividend Index (which doesn’t employ a quality screen), yields and volatility get higher, as would be expected. 9 . The Importance of Dividends The S&P 500 High Dividend Index is more of a pure-yieldpursuit strategy, catered toward investors who are seeking current income. October 2015 Exhibit 15. S&P 500 Dividend Indices Comparison S&P 500 High Category Dividend S&P 500 Dividend Aristocrats® Index Index S&P 500 S&P 500 Universe Securities with increased dividends Top 80% of every year for at least 25 years while Constituent highest-yielding meeting minimum float-adjusted Selection securities from market cap and liquidity requirements the S&P 500 selected from the S&P 500 Current Constituent Floating–80 Floating–52 (minimum 40) Number Equally Weighting Equally weighted weighted Sector Weight 30 30 Cap (%) Semiannual Reconstituted annually in January; Review (January and reweighted quarterly (April, July, Frequency July) October) 10-Year Annualized 21.84 10.17 Return (%) 10-Year Annualized 16.74 13.76 Risk (%) Current Yield 4.33 2.47 (%) Base Date Jan. 18, 1991 Dec. 31, 1989 S&P 500 Low Volatility High Dividend Index S&P 500 50 least-volatile names from the top 75 highestyielding securities from the S&P 500 Fixed–50 Historical annual dividend yield 25 Semiannual (January and July) 10.91 13.58 4.12 Jan.
31, 1990 Source: S&P Dow Jones Indices LLC. Data as of Aug. 31, 2015.
Index performance based on total return in USD. Past performance is no guarantee of future results. Table is provided for illustrative purposes and reflects hypothetical historical performance. Please see the Performance Disclosures at the end of this document for more information regarding the inherent limitations associated with back-tested performance. CONCLUSION The S&P 500 High Dividend Index is more of a pure-yield-pursuit strategy, catered toward investors who are seeking current income.
As we have seen, the index does exhibit slightly higher volatility than the benchmark S&P 500, but it has a current yield that is an average of 200-300 bps higher than that of the S&P 500. Income-seeking investors could employ this strategy in conjunction with other quintile-based S&P 500 factor strategies, based on their investment objective. LIKE WHAT YOU READ? Sign up to receive updates on a broad range of index-related topics and complimentary events. 10 . The Importance of Dividends October 2015 PERFORMANCE DISCLOSURES The S&P 500 High Dividend Index was launched on September 21, 2015. The S&P 500 was launched on March 4, 1957. All information for an index prior to the launch date is back-tested. However, it should be noted that the historic calculations of an Economic Index may change from month to month based on revisions to the underlying economic data used in the calculation of the index.
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