Rising US dividend payments augur well for high-dividend ETFs

Apr 13th, 2013 | By | Category: Equities

Dividend payments from US-listed companies were up $14.5 billion during the first quarter (Q1) of 2013, according to data from S&P Dow Jones Indices. The figure, which excludes special and bonus dividends, suggests full-year dividend payments are on track to break the record set in 2012.

Rising US dividend payments augur well for high-dividend ETFs such as SSgA SPDR S&P US Dividend Aristocrats ETF

Rising US dividend payments augur well for high-dividend ETFs such as SSgA’s SPDR S&P US Dividend Aristocrats ETF (USDV).

Over the quarter, 944 dividend increases were reported, a 39.4% gain over the 677 dividend increases reported during the same period last year. Of the approximately 10,000 US traded issues, only 139 companies decreased dividends.

For the 12 months ending March 2013, there were 3,154 dividend increases compared to 2,120 such events in the prior 12 months. There were just 389 dividend reductions.

Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices, said: “Dividends continued to increase in the first quarter with actual cash payments increasing 12% and the forward indicated dividend rate reaching a new all-time high. At this point, 2013 will easily surpass the 2012 record dividend payment, which speaks to the growth of dividends since 2012 payments included accelerated payments from 2013.”

Within the large-cap S&P 500 universe, 406 constituents, equivalent to 81.2%, were dividend payers, a level not seen since November 1999. All 30 members of the Dow Jones Industrial Average were dividend payers.

S&P Dow Jones calculated that the weighted dividend yield across all domestic listed issues was 2.61% at the end of Q1, down from 2.80% at year-end, and slightly up from the 2.58% yield at the end of Q1 2012. The lower dividend yield at the end of Q1 this year was a function of higher stock prices, with equities having gained around 10% in the first quarter.

Looking ahead, there are numerous positive indicators for dividends, including earnings coverage and high cash levels. In particular, payout rates (the percentage of earnings paid to shareholders in dividends), which historically average 52%, continue to remain near their lows at 36%, implying that companies have capacity to increase dividend payments.

“The dividend cycle is solidly back on the upward track, with both investors and companies viewing them positively. While growth is slower than the initial 2011-12 recovery period, it is broad across sectors and has support from both investors and companies,” said Silverblatt.

Overall, the positive outlook for US dividends augurs well for investors in US dividend-focused exchange-traded funds (ETFs). And with yields on equities surpassing those available on instruments such as government bonds and bank certificates of deposit, high-dividend ETFs look set to continue to enjoy strong inflows.

Indeed, in terms of asset flows, high-dividend ETFs have been among the best-performing products this year, having attracted inflows of $7.5 billion globally in the first three months of year. $3 billion was gathered by these funds in March alone, according to data from BlackRock.

In the US, popular funds in this space include the Vanguard Dividend Appreciation ETF (VIG), the SPDR S&P Dividend ETF (SDY) and the iShares Dow Jones Select Dividend Index ETF (DVY). Smaller niche products such as the ALPS Sector Dividend Dogs ETF (SDOG) and Global X Super Dividend US ETF (DIV) have also appealed to investors.

In Europe, the leading US high-dividend ETF is the SPDR S&P US Dividend Aristocrats ETF (USDV) from State Street Global Advisors (SSgA), which has accumulated assets of more than $1 billion since making its debut in October 2011. The fund is linked to the popular S&P High Yield Dividend Aristocrats Index, an index comprising the 60 highest dividend-yielding constituents of the S&P Composite 1500 Index that have increased dividends every year for at least 25 consecutive years.

Index constituents are weighted by indicated annual dividend yield, with a weighting cap of 4% to prevent the fund from being overly concentrated on a small number of names. All stocks must have a float-adjusted market capitalisation of at least $2 billion and have a three-month average daily value traded of more than $5 million. Major holdings include Pitney Bowes, AT&T, AbbVie, HCP and Consolidated Edison. The weighted average gross dividend yield of stocks in the fund is currently 2.95%, which compares favourably to benchmark US Treasuries, which yield just 1.72%.

The fund is available on the London Stock Exchange, Deutsche Borse, Borsa Italiana and SIX Swiss Exchange, and has a total expense ratio (TER) of 0.35% per annum.

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