A broad basket of high-dividend-yielding stocks, weighted and rebalanced by the amount of dividends paid, will offer an investor a value-orientated strategy that not only offers a significant yield premium over government bonds, but also tends to offer a yield premium over market cap-weighted equity benchmarks.
This is mainly because non-dividend-paying stocks are excluded from the basket, which in a market cap-weighted benchmark will be included if the stock is big enough (think technology or cyclical stocks). Secondly, by using dividends rather than market cap as a criteria to screening and weightings, this can reduce exposure to relatively expensively traded growth stocks.
The screening and weighting by dividends is a fundamental approach to index construction that will help an investor manage valuation risk every time the index rebalances. Termed ‘smart beta’, such ETF strategies have gained in popularity.
At a time when Europe’s fixed income markets can only offer negative yields for safety or low yields for potentially significant credit risk, an equity income strategy that emphasises cash returns as the best signal for transparency and shareholder value may serve as a viable alternative to investors.
Viktor Nossek is director of research at Wisdom Tree Europe
