The maxim too good to be true can be applied to all sorts of situations that seem to defy logic. Whether it's a super low-priced used car, an unbelievably sweet vacation deal or, in Wall Street circles, a stock with a 15% dividend yield.
In the latter case, it has always been construed that if a particular stock carried such an abnormally high yield, then something had to be seriously wrong with the underlying company, and therefore, you'd be well advised to stay clear of it.
"We found, surprisingly, as the dividend yield goes up, the total return tends to go up too," says Bruno del Ama, the CEO of Global X in the attached video. He says while the long-term out-performance of dividend paying stocks versus non-dividend payers is well established, little has been done to stratify yields (0-2%, 2-6%, 6-10%, etc.) and assess the returns that way.
"The sweet spot is actually for dividend payers that are not even considered in most indices, which are the 10-17% dividend payers," he says.
As the chart from the white paper below shows, the total return for this bracket was 18.7%, far ahead of the tiers that payed yields ranging from 0-10%. Of course the chance of ever seeing a 20% dividend payment is slim, but del Ama says it's the ''high probability" that the dividend will be cut that packs the most punch. When it happens, he says the stock's price "tends to react dramatically" once the market realizes the new dividend seems sustainable. And that is where most of the total return comes from.
"We believe exactly why this opportunity exists is because the financial markets and the indices, in fact, assume that these are too risky to consider," del Ama surmises, pointing out that in many cases, a yield of 10% or more can mean immediate index expulsion. "So to some extent the financial community is not even focused on these companies," and therein lies the opportunity.
Notably, Global X's SuperDividend ETF (SDIV) is now the largest of its 32 funds with over $400 million in assets. It's focused on companies that carry 6-20% dividend yields and offers a yield itself of nearly 8%; which combined with mid-single digit gains in the fund price, can make for a very compelling total return story.
- Investment & Company Information