Journal Of Indexes: Dividends Vs. Value

March 13, 2014

Dividend Yield

We will look at the dividend yield of the selected components first. Despite the dividend-yield-based selection, the dividend-yield optimization is, over the long term, not actually the main benefit of a dividend-focused index. Instead, the performance gain from investing in undervalued stock is actually higher than the gain in dividend yield on an annual basis. Comparing Stoxx Europe 50 and Stoxx Europe Select Dividend 30 yields show that on an annual basis, over the period from 1998 to 2012, the average additional dividend yield for the dividend index was 2.8 percent, while the average additional price return performance was 5.2 percent. Figure 5 shows the numbers for each year individually.

Dividend Indexes And Value Indexes

Whereas the dividend outperformance is positive in all years, the price return performance is much more volatile; however, over the long term, more of the outperformance is realized through the portfolio selection than through a yield optimization. For this purpose, true dividend-yield-optimizing concepts have emerged in recent years, such as the Stoxx Europe Maximum Dividend Index, which achieves roughly four times the yield of a regular dividend index but also reshuffles the index portfolio much more frequently to generate the additional dividend yield. For the purpose of this paper, we do not consider this type of yield-optimizing strategy; we focus on the regular dividend-based selection strategy. Naturally, we would expect a higher dividend yield than for the base index, the Stoxx Europe TMI Large Index, and indeed, the average dividend yield per component increases from 4.05 percent for the base index to 5.85 percent for the dividend index as of year-end 2012. Also, the distribution of components with respect to dividend yield is highly tilted toward higher-yielding components.

The higher proportion of stocks paying high (>10 percent) dividends in the base index compared with the dividend index, as shown in Figures 6 and 7, may be explained by the fact that many relatively small stocks with high yields are included in the broader large-cap TMI index, but do not fulfill the market-cap screening criteria employed indirectly by a select dividend index. This can be illustrated by looking at the relationship between market capitalization and dividend yield as shown in Figure 8. The majority of outliers in the dividend yield clearly stem from the very small companies in the basket.

The dividend methodology hence effectively eliminates the low-dividend-paying stocks from the selection equation; no components with a dividend yield of less than 2 percent remain in the basket; and only 16 percent yield less than a 4 percent dividend yield.



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