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Dividend growth stocks: A bird in the hand....

Dividend growth stocks: A bird in the hand....

By Catherine Yoshimoto, Sr. Index Product Manager

“A bird in hand is worth two in the bush” could be the mantra for value investors who seek out dividend paying stocks. The idea is that receiving a dividend payment today is more valuable than taking a chance on potential future stock price appreciation – especially in times of increasing uncertainty. With stock market volatility returning to higher levels and fixed income yields at record lows, there has been a resurgence of interest in dividend paying stocks. Some investors  may seek higher stock dividend yields as both a source of income and as downside protection against an uncertain equity market.

FTSE Russell provides market participants with a dividend-focused index series that includes stocks that have paid increasing dividends over ten years. The Russell Dividend Growth Index Series[1] includes a subset of the constituents found in the Russell 1000, Russell 2000 and Russell 3000 indexes (US large, small and all cap indexes). The Russell Dividend Growth Index Series methodology screens for both increasing dividend payments and tradability, and stock weights are adjusted so that no more than 30% is concentrated in any one sector. The indexes systematically maintain appropriate weightings by rebalancing constituents back to equal weight each quarter.

As illustrated in the chart below, we can see that over the full back tested index history from July 1996 through March 2016[2], each Dividend Growth Index outperformed its respective market cap-weighted counterpart with lower annualized risk.

Annualized Performance, July 1, 1996 to March 31, 2016

Source: FTSE Russell, data as at March 31, 2016. Past performance is no guarantee of future results. Certain returns shown reflect hypothetical historical performance. Please see the disclaimer for important legal disclosures.


In addition to an improved risk/return profile, during the Global Financial Crisis, the Russell Dividend Growth Index Series declined but not to the levels of its market cap-weighted counterparts. This is due to both the nature of the companies that survive the screening process as well as the associated dividend yields.

Index performance, July 1, 1996 to March 31, 2016

Source: FTSE Russell, data as at March 31, 2016. Past performance is no guarantee of future results. Certain returns shown reflect hypothetical historical performance. Please see the disclaimer for important legal disclosures.


The Russell Dividend Growth Indexes’ higher performance was influenced by the selection of stocks that pay increasing dividends, the types of companies that are captured in the screening process and sector capping. Taking a more recent period, for the 1-year ended March 31, 2016, a year in which the returns for the Russell 2000 and Russell 3000 Indexes were negative 9.8% and negative 0.3% respectively, the Dividend Growth Indexes outperformed their market cap-weighted counterparts. Their performance is attributed to the effect of both sector weighting and security selection. Notably, the Russell 2000 Dividend Growth Index outperformed the base Russell 2000 Index by over 19%, largely due to selection effect.

Attribution/Contribution for 1-year period ended March 31, 2016

Source: Morningstar Direct, data as at March 31, 2016. Past performance is no guarantee of future results. Please see the disclaimer for important legal disclosures. 


The Russell Dividend Growth Index Series was developed with users such as ETF sponsors in mind. The liquidity screen improves the tradability of the Dividend Growth Indexes while also reducing the number of constituents. Market participants can use the Dividend Growth Indexes to track this interesting market segment or as the basis of a dividend growth stocks index tracking products such as an ETF.

To learn more about the Russell Dividend Growth Index Series, please see: http://www.ftse.com/products/indices/Russell-Dividend-Growth

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[1] For additional information on the index and its construction and methodology, please see: http://www.ftse.com/products/indices/Russell-Dividend-Growth

[2] The inception date of the Russell Dividend Growth Index Series is November 11, 2014. Returns provided for each Russell index may include data for periods prior to when each Russell index was in live production. Historical returns for these Russell indexes prior to the live production date are calculated using the same Russell methodology; however, application to the performance calculation may vary due to data sources, corporate actions and the availability of historical data with respect to certain securities.
 

© 2016 London Stock Exchange Group plc and its applicable group undertakings (the “LSE Group”). The LSE Group includes (1) FTSE International Limited (“FTSE”), (2) Frank Russell Company (“Russell”), (3) FTSE TMX Global Debt Capital Markets Inc. and FTSE TMX Global Debt Capital Markets Limited (together, “FTSE TMX”) and (4) MTSNext Limited (“MTSNext”). All rights reserved.

FTSE Russell® is a trading name of FTSE, Russell, FTSE TMX and MTS Next Limited. “FTSE®”, “Russell®”, “FTSE Russell®” “MTS®”, “FTSE TMX®”, “FTSE4Good®” and “ICB®” and all other trademarks and service marks used herein (whether registered or unregistered) are trade marks and/or service marks owned or licensed by the applicable member of the LSE Group or their respective licensors and are owned, or used under licence, by FTSE, Russell, MTSNext, or FTSE TMX.

All information is provided for information purposes only. Every effort is made to ensure that all information given in this publication is accurate, but no responsibility or liability can be accepted by any member of the LSE Group nor their respective directors, officers, employees, partners or licensors for any errors or for any loss from use of this publication or any of the information or data contained herein.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any claim, prediction, warranty or representation whatsoever, expressly or impliedly, either as to the results to be obtained from the use of the FTSE Russell indexes or the fitness or suitability of the indexes for any particular purpose to which they  might be put.

No member of the LSE Group nor their respective directors, officers, employees, partners or licensors provide investment advice and nothing in this communication  should be taken as constituting financial or investment advice. No member of the LSE Group nor their respective directors, officers, employees, partners or licensors make any representation regarding the advisability of investing in any asset. A decision to invest in any such asset should not be made in reliance on any information herein. Indexes cannot be invested in directly. Inclusion of an asset in an index is not a recommendation to buy, sell or hold that asset. The general information contained in this publication should not be acted upon without obtaining specific legal, tax, and investment advice from a licensed professional.

No part of this information may be reproduced, stored in a retrieval system or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without prior written permission of the applicable member of the LSE Group. Use and distribution of the LSE Group index data and the use of their data to create financial products require a license from FTSE, Russell, FTSE TMX, MTSNext and/or their respective licensors.

© Morningstar. All Rights Reserved. For institutional use only. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results. 

 

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