By John Hughman, 12 April 2011
Stock screens
When we produce stock screens, they frequently come with the caveat that they're primarily an ideas generation tool, and that the suggestions that they produce should be followed up with further thorough research. Sometimes, an investment that looks attractive on a quantitative basis may in fact be a stinker when you dig a little deeper.
Even so, fund managers are increasingly using stock-screen style quantitative analysis as a basis for investment, creating custom indices to offer exposure to a broader range of underlying themes than bog-standard capitalisation-weighted indices.
That's especially true for those offering exchange-traded products, which need to track a basket of assets at the lowest possible cost. Stock screens enable managers to offer these highly themed vehicles cheaply, and rigorously back-test ideas to makes sure the investment case stacks up.
One such index is the UK Dividend Achievers Index, launched last year by leading 'index engineer' Indxis, the company behind the popular Mergent Dividend Achievers in the US. Since the launch of the first product in 2003, funds based on the custom indices now have $9bn of assets under management at licensees including Vanguard, BlackRock, and Invesco.
Like its US counterpart, the UK series tracks companies that have increased cash dividends consistently over a defined period, in the case of the UK, five or more consecutive years. The results are then adjusted for liquidity and size of the free float, leaving an index of 102 companies, of which 82 per cent are large caps.
That's not surprising, because blue-chip companies tend to be more consistently cash generative than smaller ones. That consistency is important, because it also points to businesses that also have the potential for dividend growth. Many income fund managers espouse looking for dividend growth rather than simply targeting pure high yield shares.
No UK fund has yet launched a product based on Indxis's data, but then the ETF industry is less mature here. The dividend achievers series outperforms the major indices in both the US and the UK, as well as similar proprietary US indices such as S&P's Dividend Aristocrats series, which consists only of companies that have increased their dividend for 25 consecutive years or more. Back tested over 5 years, the UK Dividend Achievers Index outperforms the wider UK index by nearly a percentage point every year.
We've taken the companies and applied some filters of our own: we want only those that yield above 3.8 per cent - versus the market average of 3.1 per cent - and that have increased their dividend by at least 10 per cent a year on average over the last five years.
IC Dividend Achievers
Source: Indxis
SO WHO ARE THE DIVIDEND ACHIEVERS?
Insurers feature highly on our screen of dividend achievers, because insurers tend to pay out excess capital in the form of dividends when there isn't much business to write. And while the recent spate of disasters may hold back the rate of dividend increases for a while, yields will remain attractive and rising premium rates should compensate.
PR firm
Top of our screen is
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