A High-Payout ETF Checkup


Now that Global X’s SuperDividend Fund (NYSEArca:SDIV - News) has been around more than six months, it’s worth seeing if it has lived up to its enticing moniker.

Back in June when SDIV launched, my colleague Olly Ludwig wrote about its strategy and intentions . He referred to the Vanguard Dividend Appreciation ETF (NYSEArca:VIG - News) to put SDIV’s launch in perspective. But that’s a little bit off the mark, because VIG holds U.S. companies, whereas SDIV and other ETFs like it are global in focus, which is a whole different ball of wax, especially these days.

So, considering the extreme global volatility that took place in the second half of 2011, it’s worth looking at SDIV and other funds like it. After all, many of the companies with high dividend yields are in the financial services industry—the very epicenter of the entire global economic crisis.

I’ll say this right off the bat:SDIV and others of its ilk didn’t perform well in the months following SDIV’s launch. Their high dividends pretty much got wiped out by market declines. But I’m getting ahead of myself.

First the details:SDIV is based on the Solactive Global SuperDividend Index, which equal-weights 100 companies ranking among the highest-dividend-yielding equity securities in the world. SDIV has an expense ratio of 0.79 percent.

I’d be remiss if I didn’t mention the Guggenheim ABC High Dividend ETF (NYSEArca:ABCS - News), which launched just prior to SDIV. The Guggenheim offering has an expense ratio of 0.65 percent and is based on the BNY Mellon ABC Index. It has 30 holdings, including U.S. equities, U.S.-listed ADRs and locally listed companies in Australia and Canada. The index selects the top 10 stocks with the highest yield for each country, and then weights them by market capitalization.

Other competing funds to compare the Global X and Guggenheim funds with are the WisdomTree Global Equity Income Fund (NYSEArca:DEW - News) and the First Trust Dow Jones Global Select Dividend ETF (NYSEArca:FGD - News).

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SDIV/ABCS/DEW/FGD Performance:June thru Dec 2011

As you can see, neither of the two newer “super” dividend funds has fared well since inception.

ABCS and SDIV lost over 13 and 14 percent on a total returns basis, respectively, since June, while DEW and FGD saw more muted losses. The stark reality is that high dividend yields on these funds weren’t enough to stem the tide of huge sell-offs in the underlying shares. It does investors little good if a fund has a 5 percent dividend yield but share prices fall by 19 percent.

In fact, yield-hungry investors targeting these relatively new funds would have been far better off sitting on the sidelines in zero-yielding money market funds than in either SDIV or ABCS. The truth is, in fact, that none of the global dividend funds has performed well since June. But the two new ones have performed the worst.

On the surface, it would be easy to assume that both funds must have gotten clobbered by the sell-off in financials, but that’s not necessarily the case.




Sure, SDIV has over 15 percent of its holdings in financials and financial service firms, but that’s not enough to justify such a poor showing. After all, First Trust’s FGD has 19 percent of its assets in financials, and it was the best-performing fund of the group. What’s more, ABCS has less than a 5 percent weighting to the sector, and it was the worst of the lot.

It would also be easy to say the better-performing funds were probably more defensive, owning to consumer staples, one of the most defensive pockets of the equities universe. But if that were the only reason for the fund’s better performance, you wouldn’t expect to see 12 percent of ABCS’ portfolio in that sector compared with just 4 percent for FGD.

It seems something else is at play here. The quickest way to get to the bottom of this is probably to look at the methodology of the underlying indexes. Even a quick glance likely tells us all we need to know. The best-performing funds both had different iterations of the same screening criteria:

  • History of paying dividends
  • Historical dividend growth rate
  • Maximum dividend payout ratios


These qualifiers help to eliminate companies with temporarily high dividend yields that the market expects are about to come down. In fact, dividend cuts are likely a big driving force behind the declines of both of the newer funds. For instance, take a look at the only dividend “stability check” in the Solactive Global SuperDividend Index:

“Dividend Forecast is at least stable, i.e. there is no official announcement as of the selection day that dividend payments will be cancelled or significantly reduced in the future.”

What that means in practice is that unless a company has made an official announcement of a dividend cut, the payout is considered stable.

Any investor in dividend-paying companies knows all too well that companies trading with extremely high yields are often being priced that way by the market because the market doesn’t believe the dividend is sustainable.

That doesn’t mean the market is right, and people have made a ton of money buying high-yielding stocks with the belief the dividend is sustainable and the share price will recover to more accurately reflect that reality.

In fact, ABCS has no such stability screen—a possible explanation for the fund’s worst-in-class performance since June.

The bottom line for investors is, unlike a bond, a dividend payment is not an obligation.

A company that doesn’t have a long history of paying a dividend, let alone raising its payout, is in some ways, barely more likely to pay a future dividend than a company that doesn’t even pay a dividend.

In other words, owning a high-dividend ETF that holds companies that lack such a history is a bit risky.

Your best bet is to choose a fund that attempts to quantify the sustainability of a company’s dividend, focusing not just on recent history. Sure, none of these portfolios did very well in the past year, but those that used these sustainability screens performed much better.

In short, if you’re looking for steady dividend yields to augment a sideways or even down-trending market, there is no shortcut.


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