US high-dividend ETFs boosted as American companies pay out record dividends

Oct 10th, 2012 | By | Category: Equities

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Dividend net increases (increases less decreases) were $8.8 billion in the third quarter (Q3) of 2012, according to S&P Dow Jones Indices, setting what is believed to be a new record dividend quarterly payout in aggregate dollars for US common stocks.

US high-dividend ETFs boosted as American companies pay out record dividends

S&P Dow Jones Indices reported 439 dividend increases during the third quarter of this year, a 25.4% gain over the 350 increases reported during the same quarter in 2011.

S&P Dow Jones Indices reported 439 dividend increases during Q3 of this year, a 25.4% gain over the 350 increases reported during Q3 of 2011. Fifty-three companies, of the approximately 10,000 US traded stock issues, decreased their dividend in Q3 of 2012 compared to 23 issues this time last year.

“Dividends continue to have a great year, with actual cash payments increasing over 19% and the forward indicated dividend rate reaching a new all-time high,” said Howard Silverblatt, Senior Index Analyst at S&P Dow Jones Indices.

“Payout rates, which historically average 52%, remain near their lows at 34%. At this point, we expect to see double-digit growth in actual dividend payments for the fourth quarter of 2012 and a potential double-double gain in 2013 – depending on Washington,” added Silverblatt.


SPDR S&P US Dividend Aristocrats ETF (USDV)

– Tracks the S&P High Yield Dividend Aristocrats Index,
providing exposure to high-yielding US equities

– Comprises 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

– Physically replicated with full transparency to holdings;
major holdings include Avon Products, Pitney Bowes,
AT&T, Leggett & Platt, and HCP; the fund currently
offers a dividend yield of 3.35%

– UCITS compliant, London listed, UK Reporting Status,
eligible for ISAs and SIPPs, TER 0.35%, cross-listed on
Deutsche Börse, SIX Swiss and Borsa Italiana

(N.B. The SPDR S&P Dividend ETF (SDY) listed on the
NYSE Arca tracks the same index.)

The percentage of non-S&P 500 common issues paying a dividend again increased, to 43.4% in Q3 from 42.7% in Q2, 41.7% in Q1 and 41.4% at the end of Q4 of 2011. Silverblatt also determined that yields for paying issues decreased to 2.66% at the end of the third quarter from 2.77% at the end of the second quarter.

“The yield decline was the result of a strong third quarter equity market,” explained Silverblatt. “Yields remain relatively high when compared to competing income producers such as bonds, treasuries or CDs.”

Looking ahead, Silverblatt sees many positive signs for dividends, including earnings coverage and cash assets. “Investors are seeking income and companies are increasing their aggregate payout,” noted Silverblatt. “However, while companies are paying out record amounts, they are not being generous or even distributing near their historical payout rate.  It’s not a matter of companies being cheap. It’s a matter of them being nervous about the economy and their resources, much like most of us.”

This bodes well for exchange-traded funds (ETFs) linked to high-dividend US equities, which have proved hugely popular this year. In the US, ETFs such as the Vanguard Dividend Appreciation ETF (VIG), the SPDR S&P Dividend ETF (SDY) and the iShares Dow Jones Select Dividend Index ETF (DVY) have been among the best performing funds in terms of inflows. Similarly, in the UK and Europe, the SPDR S&P US Dividend Aristocrats ETF (USDV) has accumulated over $700m in assets since its debut a little under a year ago, making it one of the most successful European launches of the past year.

Index providers are also recognising the opportunity. STOXX recently rolled out a new suite of ‘Maximum Dividend Strategy’ indices designed to act both as a benchmark for actively managed funds and as an underlying for ETFs and other investable products. The suite aims to maximise the dividend yield of a number of its headline indices by selecting the 40 companies in each index that have the highest expected dividend yield. Constituents are then weighted by liquidity-adjusted expected dividend yield: the higher a company’s dividend yield and the more liquid it is, the higher is its weight in the respective index.

Boutique index providers are also getting in on the game, most notably S-Network Global Indexes with its launch of the S-Network Sector Dividend Dogs Index back in May. This index represents a portfolio of 50 higher-yielding stocks derived from the S&P 500. The index selects the five stocks in each of the S&P 500’s ten GICS sectors that offer the highest dividend yields as of the last trading day of November. Unlike other high-dividend indices, such as the S&P Dividend Aristocrats range, the index is based entirely on dividend yield and does not include any qualitative screens, such as dividend growth, dividend consistency and coverage ratio. The index has subsequently become the underlying for the NYSE-listed ALPS Sector Dividend Dogs ETF (SDOG).

For UK and European-based investors, perhaps the best way to access US high-dividend stocks is via the SPDR S&P US Dividend Aristocrats ETF (USDV) we mentioned earlier from State Street Global Advisors. This fund tracks the S&P High Yield Dividend Aristocrats Index, an index comprised of 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. The fund is listed on the London Stock Exchange, Deutsche Börse, SIX Swiss Exchange and Borsa Italiana, and charges a total expense ratio (TER) of 0.35%. (A US version of the fund, the SPDR S&P Dividend ETF (SDY), is listed on the NYSE Arca and comes with a gross expense ratio of 0.35%.)

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