Download The Case for Dividend Growers in Volatile Markets

SDY
SPDR SPOTLIGHT
The Case for Dividend
Growers in Volatile Markets
by David B. Mazza, Head of ETF and Mutual Fund Research, Matthew Bartolini, CFA, Research Strategist,
and Jared Rowley, CFA, Research Strategist, SPDR ETFs and SSGA Funds
Key Takeaways
A focus on companies that have
consistently raised their dividends for
many years, rather than focusing on yield
alone, could provide a measure of safety in
volatile markets.
Firms with consistent dividend growth
have tended to have higher-quality
balance sheets and therefore may
provide downside protection in turbulent
markets along with some income.
SPDR® S&P® Dividend ETF (SDY)
is a potential solution that gives
investors exposure to companies that
have increased their dividend for at least
20 consecutive years.
US companies with a long track record of consistently raising their dividends
(“dividend growers”) have historically held up relatively better than the overall
market as measured by the S&P 500® Index during market drawdowns, while also
providing an income cushion.
Therefore, investors worried about volatility, but who want to remain invested in
equities while generating some income, can use dividend growers. This particular type
of stocks can augment core portfolios with high-quality companies, or those with
relatively high profitability growth, consistent earnings and low leverage.1 Quite simply,
when a company is able to reliably boost its dividend for years or even decades, this may
suggest it has a certain amount of financial strength and discipline.
SPDR S&P Dividend ETF (SDY) is a portfolio of stocks from the S&P Composite 1500
Index that have boosted their dividends for a minimum of 20 straight years.
The Case for Long-Term Dividend Growers
In challenging markets, dividends can account for a greater percentage of total return.
Since 1926, dividends have contributed about one-third of the total return of the S&P
500, with capital appreciation accounting for the rest (see Figure 1).2 However,
dividends’ contribution to overall returns has varied through different time periods
and market cycles. For example, in the range-bound US equity markets of the 1940s
and 1970s, dividends represented at least 50 percent of total monthly returns.3
Figure 1: Dividend Income as a Percent of Monthly Total Return of S&P 500
%
60
53%
50%
50
39%
40
33%
28%
26%
30
14%
20
10
0
1940s
1950s
1960s
1970s
1980s
1990s
1926 to
2015
Source: S&P Dow Jones Indices, data shown is from December 31, 1925 to December 31, 2015.
Past performance is not a guarantee of future results.
The index returns are unmanaged and do not reflect the deduction of any fees or expenses. The index returns reflect all
items of income, gain and loss and the reinvestment of dividends and other income.
The Case for Dividend Growers in Volatile Markets
Figure 3: More Companies are Cutting Dividends
Number of Dividend Decreases
1000
800
600
400
Figure 2: Dividend Growers vs. High Dividend Payers
 Number of Dividend Decreases
%
Source: Bloomberg, as of February 29, 2016.
300
200
2015
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
2003
2002
2001
0
2000
200
1999
Yet when it comes to dividend strategies, investors face a
basic decision of whether to choose companies with the
highest dividend yields, or those with more sustainable
dividends and relatively lower yields. During the low
interest rate environment of the past several years, some
investors looked beyond low-yielding bonds for income to
focus on high dividend payers, which performed well in a
rising equity market, although they may be riskier now.
Overall earnings growth has slowed, and leverage for these
high yielders is elevated. For example, SDY constituents have
a debt-to-equity ratio of 187% versus 256% for the holdings of
the iShares High Dividend ETF (HDV), as shown in Figure 2.
— 3 Year Rolling Average
256.0
Dividend Growers Can Potentially Mitigate
Risk in Volatile Markets
187.0
100
22.9
0
-100
 Total Debt to Equity
-1.6
SDY
HDV
 EPS Growth 1 Year
Source: S&P Dow Jones Indices, as of December 31, 2015.
In what could be a volatile, low-growth market, we think
investors could consider favoring dividend growers over
high dividend payers. Companies that have consistently
raised dividends for many years tend to have strong balance
sheets and businesses. Conversely, high dividend payers with
more financial leverage and lower earnings growth may be
more likely to cut their dividends. A recent trend to dividend
cuts has already begun (see Figure 3). These dividend cuts lower
the income potential of a high dividend payer strategy.
State Street Global Advisors
Firms that have consistently grown dividends for at least 20
straight years – such as Procter & Gamble (PG), Johnson &
Johnson (JNJ), 3M (MMM) and McDonald’s (MCD)4 – often
have solid brands, business models and management. They also
tend to generate relatively high cash flows and have healthy
balance sheets. Their dividend yields may not be the highest,
but they could be attractive to investors looking for disciplined
companies that can endure difficult market and economic
environments relatively well.
In particular, dividend growers may provide some downside
protection in falling markets. For example, in 2008, the S&P
High Yield Dividend Aristocrats Index saw a total return of
-23%, compared with -37% for the S&P 500.5
Since 2005, the S&P High Yield Dividend Aristocrats Index,
which is made up of companies that have consistently
increased their dividend 20 straight years or more, held up
relatively better than the overall US market as measured by the
S&P 500 during down months. Also, the drawdown protection
of dividend growers was even more pronounced during the 15
worst months for the S&P 500 during that period (see Figure 4).
2
The Case for Dividend Growers in Volatile Markets
Dividend growers can be used as a way to maintain exposure to
the equity market with some income, while helping reduce
volatility and potential drawdowns.
Figure 4: Dividend Growers: Smaller Drawdowns in
Volatile Markets
Drawdown (%)
0
SDY: A Potential Dividend Solution
-2
For investors looking for a relatively low cost, diversified
portfolio of companies with a long track record of boosting
dividends, SPDR S&P Dividend ETF (SDY) is a potential
solution. SDY tracks the S&P High Yield Dividend Aristocrats
Index, which screens for companies that have consistently
increased their dividend for at least 20 consecutive years
(see sidebar on index methodology). While the hurdle for
index inclusion is 20 straight years of rising dividends,
the index average is 35 years. Additionally, there are eight
constituents with over 53 consecutive years of dividend
increases (see Figure 5).7 Consider that some of these
companies were increasing their dividends when JFK
was President. That is consistency.
-2.86
-3.68
-4
-5.76
-6
-7.57
-8
-10
S&P High Yield
Dividend Aristocrats
S&P High Yield
Dividend Aristocrats
S&P 500
S&P 500 Down Months
-
S&P 500
15 Worst S&P 500 Months
Source: Bloomberg, State Street Global Advisors (SSGA), as of January 29, 2016.
Past performance is not a guarantee of future results.
The index returns are unmanaged and do not reflect the deduction of any fees or
expenses. The index returns reflect all items of income, gain and loss and the
reinvestment of dividends and other income.
Therefore, SDY emphasizes stability and consistency of
dividends to focus on companies with higher-quality balance
sheets that may provide some downside protection in turbulent
markets. Because of its focus on quality balance sheets, SDY
can be used to help build the core of investors’ US equity
exposure in this volatile market.
Dividend growers have also held up relatively better than
the S&P 500 during the volatility that has gripped markets
during the first two months of 2016. The High Yield Dividend
Aristocrats Index had a year-to-date index price gain of
0.7 percent as of February 29, 2016 compared with a loss
of 5.5 percent for the S&P 500.6
Figure 5: SDY Stocks Have Long History of Dividend Increases
Number of SDY Stocks
10
8
6
4
2
0
53
48
47
45
44
43
42
41
40
39
38
36
35
34
33
32
31
30
29
28
26
25
24
23
22
Number of Years with Consecutive Dividend Increases
Source: S&P Dow Jones Indices, as of December 31, 2015.
State Street Global Advisors
3
The Case for Dividend Growers in Volatile Markets
A Closer Look at SDY’s Benchmark: S&P High Yield
Dividend Aristocrats Index
• Designed to measure the performance of companies
within the S&P Composite 1500 that have followed a
managed-dividends policy of consistently increasing
dividends every year for at least 20 years.
• Weighted by indicated annual dividend yield, with
constituents being re-weighted every quarter. The
qualifying universe is reviewed once a year in January.
• Modifications are made to stock weights to ensure no
stock represents more than 4% of the index weight.
• Companies included in the index come from a broad
spectrum of industries. Unlike indices that focus only
on high dividend yields, which are typically from the
financials and utilities sectors, the “Dividend
Aristocrats” are well diversified across all sectors.
Source: S&P Dow Jones Indices: S&P High Yield Dividend
Aristocrats Methodology.
State Street Global Advisors
Definitions
Debt to Equity A measure of a company’s financial leverage
that is calculated by dividing its total liabilities by
shareholders’ equity.
Drawdown Protection The degree to which an asset or
investment can provide some potential defense to limit losses
in a falling market.
Earnings Per Share (EPS) A profitability measure that is
calculated by dividing a company’s net income by the number
of shares outstanding.
S&P Composite 1500 Index A broad benchmark designed
to track the performance of large-, mid- and small-cap
US equities.
S&P High Yield Dividend Aristocrats Index Measures the
performance of S&P Composite 1500 constituents that have
increased dividends every year for at least 20 years.
SSGA, Bloomberg. As measured by Return on Equity, Debt to Equity, EPS Growth,
and EPS Variability.
2
S&P High Yield Dividend Aristocrats Methodology, S&P Dow Jones Indices,
November 2015.
3
Standard & Poor’s.
4
These stocks were all components of the S&P High Yield Dividend Aristocrats Index
as of 1/31/2016. Source: S&P Dow Jones Indices.
5
S&P Dow Jones Indices.
6
Morningstar, as of March 1, 2016.
7
S&P Dow Jones Indices, as of January 22, 2016.
1
4
The Case for Dividend Growers in Volatile Markets
ssga.com | spdrs.com
For public use.
State Street Global Advisors One Lincoln Street, Boston, MA 02111-2900.
T: +1 866 787 2257.
This material has been created for informational purposes only and does not
constitute investment advice and it should not be relied on as such. It does not take
into account any investor’s particular investment objectives, strategies, tax status or
investment horizon. There is no representation or warranty as to the current accuracy
of, or liability for, decisions made based on this material. All material has been
obtained from sources believed to be reliable, but its accuracy is not guaranteed.
This document may contain certain statements deemed to be forward-looking
statements. All statements, other than historical facts, contained within this
document that address activities, events or developments that SSGA expects,
believes or anticipates will or may occur in the future are forward-looking statements.
These statements are based on certain assumptions and analyses made by SSGA in
light of its experience and perception of historical trends, current conditions,
expected future developments and other factors it believes are appropriate in the
circumstances, many of which are detailed herein. Such statements are subject to a
number of assumptions, risks, uncertainties, many of which are beyond SSGA’s
control. Please note that any such statements are not guarantees of any future
performance and that actual results or developments may differ materially from those
projected in the forward-looking statements.
Equity securities may fluctuate in value in response to the activities of individual
companies and general market and economic conditions.
Non-diversified funds that focus on a relatively small number of securities tend to
be more volatile than diversified funds and the market as a whole.
Passively managed funds hold a range of securities that, in the aggregate,
approximates the full Index in terms of key risk factors and other characteristics.
This may cause the fund to experience tracking errors relative to performance of
the index.
All the index performance results referred to are provided exclusively for comparison
purposes only. It should not be assumed that they represent the performance of any
particular investment.
The funds presented herein have different investment objectives, costs and
expenses. Each fund is managed by a different investment firm, and the performance
of each fund will necessarily depend on the ability of their respective managers
to select portfolio investments. These differences, among others, may result in
significant disparity in the funds’ portfolio assets and performance. For further
information on the funds, please review their respective prospectuses.
Frequent trading of ETFs could significantly increase commissions and other costs
such that they may offset any savings from low fees or costs.
It is not possible to invest directly in an index. Index performance does not
reflect charges and expenses associated with the fund or brokerage
commissions associated with buying and selling a fund. Index performance
is not meant to represent that of any particular fund.
While the shares of ETFs are tradable on secondary markets, they may not readily
trade in all market conditions and may trade at significant discounts in periods of
market stress.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and
may trade at prices above or below the ETFs’ net asset value. Brokerage commissions
and ETF expenses will reduce returns.
There is no guarantee that the stocks in the portfolio will continue to declare
dividends and if they do, that they will remain at current levels or increase over time.
The ETFs listed above have historically paid dividends to investors and/or invest in
the securities of dividend paying issuers; however, there is no guarantee that these
ETFs will consistently pay dividends to investors in the future or will appreciate in
value. Investors could loose money by investing in ETFs.
Diversification does not ensure a profit or guarantee against loss.
Standard & Poor’s®, S&P® and SPDR® are registered trademarks of Standard &
Poor’s Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow
Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been
licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain
purposes by State Street Corporation. State Street Corporation’s financial products
are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their
respective affiliates and third party licensors and none of such parties make any
representation regarding the advisability of investing in such product(s) nor do they
have any liability in relation thereto, including for any errors, omissions, or
interruptions of any index.
Distributor: State Street Global Markets, LLC, member FINRA, SIPC, a wholly
owned subsidiary of State Street Corporation. References to State Street may
include State Street Corporation and its affiliates. Certain State Street affiliates
provide services and receive fees from the SPDR ETFs.
Before investing, consider the funds’ investment objectives, risks,
charges and expenses. To obtain a prospectus or summary
prospectus which contains this and other information, call
866.787.2257 or visit spdrs.com. Read it carefully.
Not FDIC Insured • No Bank Guarantee • May Lose Value
© 2016 State Street Corporation. All Rights Reserved.
ID6424-IBG-19140 0416 Exp. Date: 04/30/2017