Income Rooted in Strength
BRANDON RAKSZAWSKI: Dividends are crucial to realizing the full potential of equity investing. I think many investors take for granted the power and impact that dividends have on long-term, total return. Most of the wonderful charts that show relative outperformance of various equity markets to other asset classes are assuming dividend reinvestment.
In fact, one of the main drivers of total return, historically, in various equity markets, has been the reinvestment of dividends. Since the 1930s, roughly 40% of the S&P 500's total return can be attributed to dividend and dividend reinvestment.1 Price appreciation alone may not be quite appealing enough from a risk/reward perspective for many investors’ portfolios.
There are many long-standing strategies that target dividend-paying companies and I think you can bucket those into two primary approaches. One being targeting high dividend yield companies, ranking those companies in a particular market by dividend yield and simply focusing on some of the highest dividend-yielding stocks in that given market.
The other bucket you could consider consistent dividend payers, or dividend growers, for those companies that have, historically, paid consistent or growing dividends over time. Both approaches, both strategies, I think have done very well for investors at times, but both are very backward looking, relying on historical data to determine asset allocation to different stocks in different companies.
These approaches may open investors to classic dividend traps. For example, high dividend-yielding companies are high yielding for a reason. In many cases investors are demanding greater income payments to compensate for, maybe, some perceived risk with equity investment in that company. For consistent dividend payers or dividend growers, investors are essentially relying on historical patterns to repeat themselves in the future. The classic “past performance is no guarantee of future results” warning may apply to some of those companies at certain points in the economic cycle.
For example, 2008 was a period when many companies with decades-long history of consistent or growing dividends were forced to cut or suspend dividend payments to shareholders completely. At VanEck we believe in a durable approach to dividend investing, this leverages forward-looking equity research to identify desirable dividend stock allocations.
The VanEck Vectors Morningstar Durable Dividend ETF leverages Morningstar's 100 person equity research team, which implements a very forward-looking equity research analysis. The strategy leverages that equity research to target, not only high dividend-yielding stocks, but those with attractive valuations and strong financial health.
Morningstar's equity research analysts forecast future cash flows well into the future to arrive at a current intrinsic value for a company. The strategy will allocate to those companies, as I mentioned, that not only have high dividend yield, but also are trading at attractive prices relative to their fair value. By targeting those companies that are trading at attractive prices, relative to their fair value, the strategy is able to not only feature attractive valuations, but offer more potential upside to investors while maintaining an attractive dividend yield.
On the financial health side of the equation, Morningstar assigns a distance-to-default score to assess and predict the probability of default or bankruptcy for a particular company. This particular score, based on Morningstar's research, has actually also been a reliable predictor of future dividend cuts for a particular company.
By focusing on those companies with lower probability of default, the strategy will allocate to the companies that also may have a lower probability of future dividend cuts. The VanEck Vectors Morningstar Durable Dividend ETF seeks to track the Morningstar® US Dividend Valuation IndexSM. This index systematically targets high dividend-yielding companies and leverages Morningstar's equity research to also focus on those with attractive valuations and strong financial health.
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1 Source: Mornignstar. Past performance is no guarantee of future results. For Illustrative purposes only.
Distance to Default Score: A structural or contingent claim model that takes advantage of both market information and accounting financial information to determine the expectation that default will occur.
S&P 500® Index: consists of 500 widely held common stocks covering the leading industries of the U.S. economy.
Morningstar® US Dividend Valuation IndexSM: is designed to provide exposure to securities in the Morningstar US Market Index that have high dividend yield, strong financial health, and attractive uncertainty adjusted valuation.
Index returns assume reinvestment of all income and do not reflect any management fees or brokerage expenses associated with fund returns. An index's performance is not illustrative of a fund's performance. You cannot invest directly in an index.
The views and opinions expressed are those of the speaker and are current as of the video’s posting date. Video commentaries are general in nature and should not be construed as investment advice. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results, are valid as of the date of this communication and subject to change without notice. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. The performance data quoted represents past performance. Past performance is not a guarantee of future results.
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