Marco Montanari of Deutsche Bank explains the potential for using high-dividend paying stocks in ETFs as a theme for adding value.
Date: May 2011
There are two main reasons for this – first, yields are very low, and secondly, the last 10 years’ performance shows that value stocks have outperformed other types of equities.
When looking at a sub-index such as the MSCI Asia ex-Japan high-dividend, for example, it outperformed on an annual basis by more than 3%, said Montanari.
And then looking at rolling one-year investments, 70% of the time over the past 10 years investors would have got a better return through buying the high-dividend index, he added.
Further, Asia has some of the highest dividend-paying stocks globally.
The potential for high-dividend stocks within ETFs
On the private banking and discretionary side of the ETF business, Montanari said that many managers have been working on funds with high-dividend stocks as underlyings.
He said he expects this segment to continue to grow because during market downturns, stocks paying higher dividends have been able to limit the losses to a certain extent through their dividends.
To create the ETF, managers don’t just pick the stocks which pay the highest dividend, he explained. Instead their analysis is much more robust.
For example, they take the main index first and exclude any REITs. Their screening process then involves them removing stocks whose earnings are too low, to avoid artificially inflating any dividends, as well as those stocks whose dividends are too high and which are therefore not sustainable.
They then pick the stocks where the dividends are at least 30% higher than the average level for the index.
As a result, said Montanari, it is not about picking the stocks with the highest dividends once every three years – rather a bi-annual rebalancing based on these rules.
It is something which would take individual investors a lot of time to do a similar thing manually, he said.
Actively-managed ETFs
According to Montanari, 80% of the ETF investor base in Europe and Asia is institutional, which use the product as an asset allocation tool to implement their view.
If there is a product, therefore, which already tries to do this job for them, it will be difficult for them to invest in because it will be almost impossible to predict what these investors will want from the ETF specifically.
