The majority of UK-based IFAs expect dividends to fall this year compared to 2015, according to research from Source ETFs. Commodities, Industrial goods and banking are expected to see the biggest drop in dividend, while technology, property and healthcare may see the biggest rise this year, the report states.
While global dividend growth was 9.3 per cent in 2015, 69 per cent of the IFAs surveyed expected it to be 5 per cent or less this year. Further, 27 per cent believe advisers will increasingly focus on smart beta strategies to enhance dividend yields.
The findings were published on the back of the launch of three smart beta income ETFs from Source. These products are available on the company’s new physical ETF platform, with assets managed by Legal & General Investment Management (LGIM). These ETFs aim to provide exposure to the new FTSE RAFI equity income indexes, which target high-dividend-paying stocks that have been screened to favour sustainable income. The ETFs will offer investors a choice between US, UK and Europe.
Each ETF has an ongoing charge of 35 basis points and pays quarterly dividends.
The index construction strategy for these funds includes a screening process from Research Affiliates, a US-based indexing strategy firm. The company uses fundamental measures to screen out those companies it considers to be in poor financial health. It then selects the top 50 per cent in each sector on the basis of their dividend yield. The portfolio is not rebalanced at any prescribed interval, but the managers aim to do it between two and four times a year.
The approach is not forward looking but relies purely on technical analysis, as is the case with many smart-beta providers. The strategy involves looking at trailing 12-month dividend when selecting stocks.
All three ETFs have similar exposure across sectors, with the highest in financials, followed by consumer goods and utilities. Other sectors include consumer services, healthcare, oil & gas and basic materials. It is worth noting that the current index yield for the fund with exposure to the US is the lowest at 3.5 per cent. The UK equity income ETF has an index yield of 4.8 per cent, while the European ETF has an index yield of 5.1 per cent.
“There are two reasons that the US indices offer a lower yield,” Mr Mellor explained. “Historically, US companies have typically paid out lower dividends than UK or European companies. Also, the lower yield also reflects a higher level of valuation for US equities. On most measures of value, US equities are either overvalued or fair value, by contrast equities in the rest of the world appear undervalued.”
However, even though the ETFs are getting popular slowly, IFAs tend to remain reluctant on recommending them to their clients.
The report from Source shows that only about 21 per cent IFAs invest in smart beta strategies. Of those who do not, only 19 per cent anticipate they will over the next two years. The report further states that while 35 per cent believe more smart-beta ETFs will launch over the next three years, about 8 per cent anticipate a decline.
