Insights for Investors by Investors

Dude, where is my dividend?

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In a year of pandemic-forced lockdowns, record high government spending, lower corporate earnings and zero growth in interest rates, asking for a high dividend is a little Oliver Twist-like: “Please Sir, I want some more.” Even the most reliable of “reliable” dividend-paying companies ditched or lowered their dividend payouts because it simply wasn’t feasible to continue doing so.

The big four banks were forced to cut dividends on APRA’s orders, and gold-label names such as James Hardie (ASX: JHX), Challenger (ASX: CGF), Qantas (ASX: QAN), Transurban Group (ASX: TCL) and Sydney Airport (ASX: SYD) ditched entirely, or slashed, their dividends. According to a report released by Janus Henderson, global dividend payments fell by US$108 billion ($154 billion) to US$382 billion ($546 billion) in the second quarter of the year. That is a 22% year-on-year drop, making it the biggest fall since the GFC.

The knock-on effect? These dividends that are paid after the full-year (June 30) reporting season are usually reinvested into the market and economy as pre-Christmas spending. Most retirees fund their lifestyle via dividend income. Unfortunately, this dividend collapse will equate to an income hit. The list goes on.

Australia is perhaps a little more vulnerable than most other countries to this dividend crunch due to its two-speed banking and mining economy. With the virus far from over, investors reliant on dividend income need another solution.

Dubbed the ‘Intelligent way to tap into US yield,’ ETF Securities has devised an easy and cost-effective way to access dividend-paying US companies. ETFS’ S&P 500 High Yield Low Volatility ETF (ASX: ZYUS) is an exchange-traded fund providing exposure to US equity yield via a selection of 50 low-volatility, dividend-paying stocks from the S&P 500 Index. Why the US? Because the US stock market is highly diversified and has a variety of sectors not offered in Australia.

Dividend Yield 6.26%-10.45%

ETF Securities says its “ZYUS aims to provide investors with a return that (before fees and expenses) tracks the performance of the S&P 500 Low Volatility High Dividend Index. It uses a full-replication strategy to track the index, meaning it holds all the shares that make up the index in proportion to their index weights. This index is designed to provide exposure to 50 high-yielding, low-volatility stocks from the S&P 500, while meeting diversification and tradability requirements. Index constituents are weighted in proportion to their dividend yields.”

What is the weighting and methodology?

The S&P 500 Low Volatility High Dividend Index identifies the 75 highest-yielding companies, subject to a cap of 10 stocks per sector, and then removes the 25 most volatile. It then weights the 50 remaining companies according to dividend yield. Individual stocks are capped at 3% each and sector weights are capped at 25% of the portfolio to ensure diversification across stocks and sectors.

One attractive aspect of using ZYUS is that it does away with the W-8BEN tax forms and overseas withholding tax, usually required when investing in US assets: these are not required when investing. ZYUS can be used as a tactical tilt toward yield or defensive stocks, US equities or style factors such as low-volatility. The low-volatility screening used in the S&P 500 Low Volatility High Dividend Index results in a more defensive sector allocation than the S&P 500 and has historically provided superior long-term, risk-adjusted returns. The result is a markedly different portfolio:

  • Top sector weights:
    • Utilities – 18%
    • Real estate – 14%
    • Materials – 13%
    • IT – 12%
  • Top company weights include:
    • Dow Inc.
    • AT&T
    • Iron Mountain
    • International Paper Co.

The ETF is highly exposed to those sectors benefiting most from a COVID-19 vaccine-led recovery, but it has been volatile, still down –23% for the year. 

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