New research from Source, one of the largest providers of Exchange Traded Funds (ETFs) in Europe, reveals 61 per cent of institutional investors anticipate that dividends from UK companies will stay the same or decline this year when compared to 2015.
Some 64 per cent of institutional investors anticipate this about dividends from European stocks, and 52 per cent predict this for US equities.
When asked which three sectors would see the biggest fall in dividends paid this year, 77 per cent cited oil/gas/energy; 41 per cent said industrial goods and services, and the same percentage (41 per cent) said banking and financial services. When asked which three sectors would see the biggest rise in dividends paid this year, 43 per cent said healthcare, 35 per cent said banking and finance and 32 per cent said technology.
Earlier this month, Source and Research Affiliates LLC, a global leader in smart beta and asset allocation, launched three smart beta income ETFs that provide exposure to the new FTSE RAFI Equity Income Indices. These target high-dividend-paying stocks that have also been screened to favour sustainable income. The ETFs will offer investors a choice between US, UK, and European exposure.
Dr Chris Mellor (pictured), Executive Director, Equity Product Management at Source, says: “Finding quality stocks that pay attractively consistent dividends is becoming much more challenging. Given this, we teamed up with Research Affiliates, the market leaders in smart beta, to develop a suite of ETFs that addresses this growing issue.”
The new ETFs use Research Affiliates fundamental measures to screen out companies in poor financial health, and then from the remaining stocks, they select the top 50 per cent in each sector based on their dividend yield. It then weights the constituents by the product of their dividend yield and RAFI fundamental weight, which is based on four fundamental measures of the company’s size rather than its market capitalisation. The aim of this process is to build a portfolio of high-yielding, high quality stocks while avoiding excessive sector tilts and the biases that are inherent in market-cap-weighted indices.
These are also the first funds to be launched on Source’s new physical ETF platform, which is being managed by Legal & General Investment Management, one of the largest index fund providers in the UK and also one of the largest smart beta managers and the largest global manager of FTSE RAFI index strategies. The Source FTSE RAFI Equity Income ETFs will invest physically in the underlying holdings of the indices.