Research Report: Dividend Watch Equity Income Trends & Strategies | Q2 2021

September 1, 2021

Research Papers | U.S. Large Caps | U.S. Small Caps

Hidden Dangers of the Value Rotation

Value stocks are those that appear to trade at a low price relative to their fundamentals. They tend to exhibit characteristics such as low price-to-earnings-ratio, low price-to-book ratio or high dividend yields. Value investors may find these stocks appealing because all things equal, they trade at a discount relative to other segments in the market.

What happens when valuation metrics fail to tell the whole story and instead reflect underlying problems in a company’s health? This is when Value stocks can become value or dividend yield traps. What has driven the recent Value outperformance, and can it be sustained? Factors such as rates and oil have been a tailwind for traditional Value strategies, but will these recent tailwinds persist long-term?

New this Quarter:

  • IHidden Dangers of a Value Rotation
  • I3 Things that Drove the Value Rally
  • IEnergy & Financials: Calendar Year Drawdowns

Download the Report

reCAPTCHA
Investor Type

Why Dividend Quality Matters

2020 was challenging for global economies as the pandemic forced many businesses to shut down, at least temporarily. As a result, companies in the most impacted sectors were forced to either cut or suspend dividends. This highlighted the importance of an emphasis on dividend quality in equity income strategies. Companies that have demonstrated the ability to consistently grow dividends and have stronger dividend coverage may be better positioned to weather unexpected interruptions to operations.

Quality Dividends for Income Growth and Stability?
We believe companies with strong dividend growth and coverage have an increased likelihood that they will be able to maintain and grow dividends paid to investors even during periods of economic duress.

Dividend Strategies, How Important is Dividend Growth?

Dividends are distributions of a company’s profits to it’s shareholders. A history of consistent dividend growth indicates the long-term profitability of a company. Using a 5-year annualized dividend growth rate, the companies in the top quartile generated an average annualized return of over 20% during the same time frame. Companies in the 4th quartile had a negative dividend growth rate and generated an average annualized return of 8% over the last 5 years.

Source: Bloomberg Finance L.P., data as of 06/30/2021.
Past performance does not guarantee future results. The referenced index is shown for general market comparisons and is not meant to represent the O’Shares Funds. Investors cannot directly invest in an index.

Where Can Investors Turn for Income?

Dividend stocks, bonds, real estate investment trusts (REITs) and master limited partnerships (MLPs) are categories investors may use to generate income in their portfolios. Selecting an investment based on yield alone may result in unexpected risks. Each of these categories has unique characteristics that investors may want to consider before investing.

Generating Income for Clients, Investing Hypothetical $1,000,000 Investment

Assumptions:
Investment amount (2009): $1,000,000.
Bond Yield: 3.84% based on U.S. 10-Year Treasury Bond.

Source: Bloomberg Finance L.P., data as of 12/31/2020.
Past performance does not guarantee future results. The referenced index is shown for general market comparisons and is not meant to represent the O’Shares Funds. Investors cannot directly invest in an index.

Definitions:

1st Quartile: Contains the top 25% of companies in the S&P 500 based on average 5-year return on assets.
2nd Quartile: Contains the top 25%-50% of companies in the S&P 500 based on average 5-year return on assets.
3rd Quartile: Contains the top 50%-75% of companies in the S&P 500 based on average 5-year return on assets.
4th Quartile: Contains the bottom 25% of companies in the S&P 500 based on average 5-year return on assets.

Dividends: Represented by S&P 500 Dividends Aristocrats Total Return Index. Designed to measure the performance of S&P 500 Index constituents that have followed a policy of consistently increasing dividends every year for at least 25 consecutive years.

MLPs: The Alerian MLP Index is the leading gauge of energy infrastructure Master Limited Partnerships (MLPs). The capped, float-adjusted, capitalization-weighted index, whose constituents earn the majority of their cash flow from midstream activities involving energy commodities, is disseminated real-time on a price-return basis (AMZ) and on a total-return basis (AMZX).

Growth: Represented by S&P 500 Growth Index. The S&P 500 Growth Index is a market capitalization weighted index. All the stocks in the underlying parent index are allocated into value or growth. Stocks that do not have pure value or pure Growth characteristics have their market caps distributed between the value & growth indices.

REITs: Dow Jones Equity REIT Total Return Index. The Dow Jones Equity All REIT Index is designed to measure all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as equity REITs according to the S&P Dow Jones REIT Industry Classification Hierarchy. These companies are REITs that primarily own and operate income-producing real estate.

Our Next Livestream Starts In

O’Shares Livestreams are usually on Thursdays at 11AM ET. Topics include current market investment themes and internet and dividend related research.

Subscribe to O'Shares Research

Investing in ETFs starts with understanding it. O'Shares publishes original research, subscribe for access to exclusive content and industry insights.