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Income in equities

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By Susan Darroch

What does the Centurion ‘Black’ American Express Card, the Qantas Chairman’s Lounge and the S&P Global Dividend Aristocrats Index have in common? Their members all belong to a very exclusive club.

In the case of the S&P Global Dividend Aristocrats Index, we are talking about high-yielding companies that have grown or maintained their dividend yields for at least 10 consecutive years. This is a high bar for companies to clear — out of 11,000 stocks in the S&P Broad Market Index (BMI), which is a global index, only the top 100 stocks based on dividend-yield weights are included in the S&P Global Dividend Aristocrats Index.

What it means for investors

With such a highly select group of stocks in the S&P Global Dividend Aristocrats Index, investors can access dividend growth and potentially more stable income returns.

We believe that investors seeking long term income should consider the sustainability of dividend yield rather than just the size of dividends. Companies that have consistently raised or maintained dividends for many years tend to have strong balance sheets and businesses. Conversely, companies with more financial leverage and lower earnings growth may be more likely to cut their dividends. Some companies that have enticed investors with headline dividend payouts may disappoint later by cutting or even failing to pay dividends in the next dividend cycle.

Diversification

Investors may find the top 10 constituents stocks of the S&P Global Dividend Aristocrats Index to be relative unknowns (the index holds only one Australian-listed stock and they are not in the top 101), but the stock screening process ensures that the resulting portfolio includes only the stocks that are most likely to consistently achieve a balance between high dividend yield and dividend sustainability and growth in varying cycles and environments.

This comes from the portfolio’s diversification, which cuts across sector and country allocations, with caps on country and sector weights. The chart below shows that no sector in the index has greater than 25% weight. No single stock exceeds 3% weight, whilst sector and country weights are capped at 25% and no more than 20 stocks may be held from any one country. Domestic high yield equity portfolios, in contrast, tend to have a high Financials sector concentration, while in a typical global market-cap weighted index, the US accounts for around 60% of the total index weight2.

Source: S&P Dow Jones Indices, as of 30 September 2017 *based on GICS sectors The weightings for each sector of the index are rounded to the nearest percent; weights are as of the date indicated, are subject to change, and should not be relied upon as current thereafter.

While most exclusive clubs are hard to access, Exchanged Traded Funds (ETFs) such as the SPDR® S&P Global Dividend Fund (WDIV), which tracks the S&P Global Dividend Aristocrats Index, offer investors an easy and cost-efficient way to access this opportunity. Since the funds inception on 1 November 2013, WDIV has delivered a return of 10.13% p.a3. Investors looking for diversification and income may consider WDIV as a key part of their overall investment portfolio.

Learn more about SPDR S&P Global Dividend Fund (WDIV).

This is a sponsored article from State Street Global Advisors.

Issued by State Street Global Advisors, Australia Services Limited (AFSL Number 274900, ABN 16 108 671 441) ("SSGA, ASL") www.spdrs.com.au. This material is of a general nature only and does not constitute personal advice. It does not constitute investment advice and it should not be relied on as such. It does not take into account your individual objectives, financial situation or needs and you should consider whether it is appropriate for you. You should seek professional advice and consider a products disclosure statement, before making an investment decision. ©2017 State Street Corporation —All Rights Reserved. AUSMKT-4000 | Expiry date: 31 October 2018.


1Factset, as at 30 September 2017.

2As at 29 September 2017 the US accounted to 58.86% of the MSCI World Index

3SSGA, as at 30 September 2017. Inception date is 1 November 2013. Past performance is not a reliable indicator of future performance. The performance figures contained herein are provided on a net of fees basis, before taxes but after management and transaction costs. Returns have been calculated assuming reinvestment of all distributions and is calculated in AUD. Visit www.spdrs.com.au for the full performance history.

 

Published: Wednesday, November 08, 2017


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