There are many ways to create a dividend investing strategy. You can target long-term payers, such as the dividend aristocrats. Or you can simply focus on above-average dividend yields.
Those types of strategies, though, fail to consider one very key aspect of dividend investing:dividend health. ETFs that identify “quality” dividends, those that are supported by strong cash flows, manageable debt and solid balance sheets, tend to perform well, because they are filled with companies in strong financial positions and are committed to paying and growing their dividend over time.
Newcomer Advisors Asset Management joins the ETF marketplace this week with a pair of funds that hope to deliver some quality returns of their own.
Here are this week’s new fund launches:
|Ticker||Name||Issuer||Launch Date||ETFdb.com Category||Expense Ratio|
AAM S&P 500 High Dividend Value ETF
|Advisors Asset Management||11/28/2017||Large Cap Blend Equities||0.29%|
AAM S&P Emerging Markets High Dividend Value ETF
|Advisors Asset Management||11/28/2017||Emerging Markets Equities||0.49%|
For a list of all new ETF launches, take a look at our ETF Launch Center.
AAM Focuses on Dividend Health and Yield
Both of AAM’s new funds focus on identifying quality dividends by looking at a company’s free cash-flow yield. Free cash flow is the amount of cash a company generates after paying all of its bills and reinvesting back into itself. The free cash-flow yield looks at free-cash flow per share compared to the current stock price. In theory, companies with strong free-cash-flow yields are in strong financial positions and pay dividends that are well supported. Past studies have demonstrated that companies with strong free cash-flow yields have performed very well against companies with less impressive numbers.
AAM’s Head of ETF Product Lance McGray explains, “Reaching for the highest-yielding stocks is not always the best course of action. Just as important as the actual dividend yield is the sustainability of that dividend. In our opinion, free cash-flow yield is an ideal indicator of dividend sustainability, and when coupled with dividend yield in the selection process, the result can be powerful.”
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The AAM S&P 500 High Dividend Value ETF (SPDV) looks for strong dividend payers in the large-cap universe. It starts with the S&P 500 and, initially, pulls out securities with both a positive dividend yield and a positive free cash-flow yield. From there, a statistical model is used to assign scores based on those two yield figures, and ranks qualifying companies from top to bottom. The top five scoring securities from within each of the 11 S&P GICS sectors makes it into the final portfolio. The ETF is equal-weighted and gets reconstituted semiannually. The indicated dividend yield on the fund’s underlying index is 3.8%, nearly double that of the S&P 500. Taking into account the fund’s 0.29% expense ratio, it’s reasonable to assume that the fund’s yield will come in around 3.5%.
The AAM S&P Emerging Markets High Dividend Value ETF (EEMD) follows a similar methodology. Targeting primarily mid- and large-cap companies within roughly two dozen emerging nations, the fund is heavily weighted currently to China and Taiwan, which comprise nearly half of the portfolio. Rounding out the top five country holdings are Russia (10%), South Africa (9%) and South Korea (8%). The underlying index has a dividend yield of over 5.5%, which, even after fund expenses are considered, would immediately make it one of the highest-yielding emerging markets equity ETFs available.
To check out how this fund stacks up against other emerging markets ETFs, click here.
The Bottom Line
There are many funds that focus on high dividend yields. There are many funds that focus on quality dividends. There are very few, however, that concentrate on both. This pair of ETFs could be interesting for dividend investors, as they are among the highest yielding quality dividend funds in their respective categories. One of the ancillary benefits of a strategy, such as this, is that it generally produces a portfolio of more mature, value-oriented companies. This is evidenced by the fact that the valuation metrics of each fund, such as price/cash flow, price/sales and price/book value, are well below the averages of their peer groups. Given that broader market valuations are stretched right now, these funds could provide investors with a bit of downside protection in addition to a strong yield. Investors who seek regular income will also appreciate that these funds pay monthly, instead of quarterly, dividends.