ETF Trends caught up with Eric Legunn, CFA, a member of the DWS Research Institute, to discuss the high dividend space given the recent sell-off in capital markets.
Eric, what does this sell off mean for high dividend equity investors? Have yields now spiked higher across the board, making these strategies less relevant?
The selloff could mean that already high-yielding stocks have become higher yielding. Remember, the prices of equities typically move faster than their dividends. In other words, dividend amounts tend to be relatively stable, and this could boost yields for investors when share prices decline. That being said, the worse an economic crisis becomes, the more likely it is that companies may cut their dividends. This is why it is important, in uncertain times like these, to consider high quality, persistent, sustainable dividends.
Yields have been spiking higher across the board, but these strategies are not less relevant, for the same reason why investors want to hold well diversified portfolios of large cap stocks, small cap stocks, investment grade bonds, high yield bonds, and alternatives – having exposure to the high dividend yield stocks, and therefore the high dividend factor (or the historical tendency for high dividend yield stocks to deliver superior risk adjusted returns) could ultimately provide diversification benefits and return-enhancing qualities for portfolios.
How do dividend investors avoid the yield trap (and perhaps you’d remind our readers exactly what the yield trap is)?
The yield trap occur when some stocks appear to have superficially-high yields as a result of recent poor share price performance. These stocks are called “Yield Traps” as they may, by their yield alone, appear to be attractive investments, but in reality their recent poor share price performance reflects underlying fundamental weakness. To avoid them, a strategy could, for example, screen out stocks that have the most negative one-year price performance.
Are dividends broadly similar in the US versus other big international markets? And do they pay on the same frequency? How do ETFs cope with dividend payments that need to go out regularly to fund investors but are presumably being received on different dates within the fund?
There are some differences, for example some foreign dividend stocks have irregular dividends that do not reflect the rigid quarterly payout schedules and stability, in terms of the amount or timing of the dividend, that US investors may be accustomed to. And to answer the last question, ETFs cope with the dividends by allowing them to accrue into the fund first before paying them out in the form of quarterly dividends, so there is a degree of cash management in the fund that the Portfolio Manager has to oversee.
Is it your view that these strategies may become increasingly relevant as bond yields globally remain low?
This is truly up to each individual investor. For those investors that place a premium on current income over long-run capital appreciation, high dividend stocks may become increasingly relevant as already low global bond yields can drop lower from current levels, and then stay lower for longer. With negative yields popping up in global developed markets where growth continues to slow, in part due to ageing populations and overall changing demographics, we may currently be witnessing a global secular trend of lower-for-longer interest rates.
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