Indexology^® Blog

Take a deeper dive on our recent paper, From Zero to Hero: The Indian Case for Global Equity Diversification, which explores how and why some investors are looking abroad for potential opportunities, with S&P DJI’s Tim Edwards & Koel Ghosh.

https://www.youtube.com/watch?v=IrCErJrvtCQ

Dividends are an important part of the investment toolkit, contributing 36% to the total return of the S&P 500^® since 1936.¹ This sizable contribution has been particularly welcome during the multi-year low interest rate environment and, more recently, as the world has faced economic dislocations induced by COVID-19. In addition to dividend income, investors have been clamoring for higher-quality companies, with sustainable earnings and a less-volatile return profile.

S&P Dow Jones Indices recently unveiled a series of indices that addresses these themes: the S&P U.S. Dividend Growers Index and S&P Global Ex-U.S. Dividend Growers Index. In this blog, we offer an introduction to these indices and highlight their most salient features. In two subsequent blogs, we will explore methodological details and highlight the indices’ characteristics and historical performance.

Focus on Dividend Growth

The S&P Dividend Growers Indices focus on companies that have a history of consistently increasing dividends over multiple, consecutive years (10 years for the U.S. index and 7 years for the Global ex-U.S. index). Put simply, a company’s ability to reliably boost dividends for multiple years should be an indication of a certain amount of financial strength and discipline. Moreover, with limited opportunities for income generation and investor concern around market volatility, dividend growers’ commitment to consistent capital return may provide a more sustainable and stable source of income, potentially with lower volatility (see Exhibit 1).

Avoiding Dividend Yield Traps

Not all yields are created equal. A company’s dividend yield is calculated as its dividends divided by the company’s stock price. It is possible that a company earns a high dividend yield moniker simply through price underperformance, rather than as a result of growing its dividends. The S&P Dividend Growers Indices attempt to avoid these yield traps by excluding the top 25% of the highest-yielding eligible companies. Our research shows that, on average, the highest-dividend-yielding securities have historically proven to be yield traps, having achieved their high yielding status through underperformance (see Exhibit 2).

These lackluster returns could point to underlying business instability, with the highest yielders unfavorably changing their dividend policies, on average, at nearly triple the rate of the index constituents for the U.S. index, and at nearly twice the rate for the Global ex-U.S. index.² Not surprisingly, these potential yield traps tend to exhibit lower risk-adjusted returns (see Exhibit 3).

Creating a High Capacity Index

When creating an index, one of the most critical considerations is the index’s investability (i.e., how efficiently the index can be replicated). The S&P Dividend Growers Indices were created with an eye toward high-capacity strategies. The next blog will address index construction and describe liquidity thresholds, the multi-day rebalance schedule, our stock weighting approach, and inclusion of every eligible company—all techniques designed to enhance the indices’ investability.

¹ Source: S&P Dow Jones Indices LLC and FactSet. Data as of May 31, 2021.

² We define an unfavorable dividend policy change for consistent dividend growers as dividend elimination, omission, cut, or maintaining same level of dividends.

What happens when cutting-edge ESG data is applied to quality dividend growers? Jon Winslade and Ari Rajendra of S&P DJI join Ryan Reardon of State Street Global Advisors to explore how the new S&P ESG Dividend Aristocrats Indices could help market participants identify and access new and innovative opportunities.

https://www.youtube.com/watch?v=0VPlGfzMkZU

Discover how index-based strategies are expanding access to technology and innovation factors with S&P DJI’s Anu Ganti, Direxion’s Dave Mazza, and ProShares’ Simeon Hyman.

https://www.youtube.com/watch?v=gZH6Cam75mE

The S&P GSCI rose 31.4% in the first half of 2021, outperforming the S&P 500^®, which rose 15.2%. The S&P GSCI has more than doubled since hitting an all-time low during the initial stages of the COVID-19 pandemic in April 2020. Several commodities have reached new all-time highs this year, as the global economy has reflated, consumer confidence hit pre-pandemic highs in many regions, and supply chains remained disrupted. Aggressive fiscal and monetary support has also buoyed the recovery in industrial commodities prices. But it may not be plain sailing for commodities over the following months; recent flattening of the yield curve in the U.S. and elsewhere would suggest that, at least for now, the inflation trade that has been supporting commodities has lost some of its appeal.

The S&P GSCI Petroleum rallied an impressive 49.0% over the first six months of 2021. While uncertainty over the course of the COVID-19 pandemic may temporarily limit the final push to normalize demand, there is no doubt that a robust recovery in many major markets combined with impressive supply discipline have justified the recovery in prices. Market participants will be watching the disagreements within the OPEC+ alliance closely, given that any longer-term deadlock could signal the beginning of the end for the broader supply agreement and increase the risk that members independently turn on the taps.

Following a sprint higher over the first few months of the year, prices for industrial metals have cooled marginally in the wake of attempts by Chinese regulators to dampen speculation in its domestic commodities markets and signs that the U.S. Federal Reserve is concerned about inflation. Following year-long rallies across the industrial commodities markets, the suggestion that U.S. interest rates may be hiked sooner than expected and Beijing’s plans to release strategic metal reserves were a double whammy to metal’s reflation story in June. Nevertheless, the S&P GSCI Industrial Metals ended June up 19.5% YTD.

Precious metals, particularly gold, was the clear loser in the commodities complex in the first half of the year. By the end of June, the S&P GSCI Gold had fallen 7.0% YTD, after the U.S. Federal Reserve sped up its expected pace of policy tightening, which led many market participants to reconsider the so-called inflation trade. The rise in U.S. stocks to a fresh record and a resurgent U.S. dollar also weighed on the yellow metal.

The S&P GSCI Agriculture finished the month flat but rallied 19.1% YTD. Apart from cocoa, all constituents of the S&P GSCI Agriculture subindex ended the first half in positive territory, but the clear winner was corn, with the S&P GSCI Corn up 38.9% YTD. The multi-month rally in corn prices followed an abrupt tightening of global corn supplies, including the announcement by the USDA on the last day of June that U.S. farmers had planted less acres of corn than expected.

The S&P GSCI Livestock rallied 7.5% over the first six months of the year. Some of the luster came off lean hogs in June, with the S&P GSCI Lean Hogs falling 11.3% in the wake of China’s announcement that the country’s hog herd was rebuilding faster than expected from African swine fever.