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High-yield funds

Created:
21 April 2008
Written by:
David Stevenson

I've talked many times before about the power of the dividend yield as a component of total shareholder returns. Over the very long-term, the dividend yield makes up anything between 75% and 95% of total long-term shareholder returns, especially if dividends are reinvested in shares.

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The dividend yield is also beautifully simple to understand - it's an actual twice yearly payment made to you by the company you're investing in. There is no subjectivity, as there is with any profit-based metric. And finding high yielding stocks is also insanely easy. Any simple investment software or on-line web site will have a function that allows you to sort the market by yield, specifying in turn which bit of the market.

Most stock screens based around dividends are as simple as that - there's no worrying about value considerations such as fundamental book value or whether or not free cash flow can cover capex. You simply sort companies by their index yield and then buy the top ten yielding stocks within, say the FTSE 100. The only real worry is whether the company's finances are strong enough to cover the dividend going forward.

And you don't even have to do this legwork yourself if you don't want to. There are now a number of ETF and tracker unit trust funds that will do it for you. The iShares and Deutsche DBX funds listed in the box below simply take a key universe of stocks (say the DJ euroStoxx top 50 funds of Euroland), sort them by yield, and then buy all the stocks above a certain average yield.

The iShares UK Dividend Plus Fund sorts the FTSE 350 and then weights its holdings by yield whereas the various DJ EuroStoxx and DJ Global funds from both iShares and DBX take the wider universe of European and/or global developed markets stocks and then buy the top yielding shares.

The tables below describe the top holdings in the DBX DJ Select Dividend Global stocks fund – the 100 top yielding stocks in this index and accompanying fund span the world in a fairly diversified manner although there's a heavy weighting towards financials, which comprise 45% of total global holdings.

Sector Weightings
Telecoms 16%
Utilities 16%
Industrials 8%
Oil and Gas 6%
Basic Materials 4%
Consumer Services 3%
Consumer Goods 2%
Financials 45%
Country Weightings
UK 12%
Hong Kong  11%
Singapore 11%
Canada 8%
Japan 8%
Germany 7%
Norway 4%
United States 27%
Australia 12%

An alternative way of structuring a fund comes in the form of the S&W Munro fund, run by Rob Davies. This tiny but highly innovative fund takes the FTSE 350 universe of stocks here in the UK and then works out the total annual dividend payment per stock. It then weights the constituents by yield, rather than market capitalisation as FTSE Actuaries does. The result is an index even more heavily weighted towards mega-cap shares.

This approach ties in with my own thinking about this kind of investment - buying high-yielding shares in very large companies - as espoused recently in ...

But the future potential also comes with an important caveat. As the table below shows, returns from dividend-oriented funds have been dreadful in the last few months, partly because the most generous yielding sectors have often been the banks and financials, and they've been hit the hardest by the market downturn.

ETFs from DBX and iShares are already yielding an average of between 4 and 6% per annum. I expect that once yields top 6 per cent consistently, there'll be a recovery in demand. The question then will be working out which fund to start buying; I'd recommend a mix of funds including the DBX Global STOXX 100 fund, the DBX EuroSTOXX 30 Select Dividend fund, the iShares Asia fund and the Munro fund for the UK. All charge between 0.3 and 0.75% per annum in total expenses and all can be easily bought through ETF and unit trust regular investment plans offered by the likes of Selftrade, The Share Centre and Halifax Sharebuilder , with dealing rates that vary between zero and £2.50 per purchase.

Metrics on key high-yield trackers

Name Yield Close Price performance (%) Volatility Correlation Beta
1M 3M 6M 1Y 2Y
DB X-Trackers DJ Euro Stoxx Sel.Div30ETF 22.1 4.77 -3.92 -6.41 1.54 0.85 1.22
DB X-Trackers DJStoxx Glbl Sel.div100ETF 18.9 3.9 -4.76 -11.6 1.52 0.87 1.24
iShares DJ Euro Select Dividend 4.07 23.3 5.24 -3.44 -6.2 -9.02 16.2 2.67 0.31 0.78
iShares DJ Asia/Pacific Select Div 5.22 17.0 5.04 -3.88 -13.2 -9.48 1.5 0.8 1.11
iShares FTSE UK Div Plus 5.59 9.64 0.1 -3.6 -19.4 -28.4 -13.93 1.16 0.84 0.91
S&W Munro A Inc 0.86 4.94 -7.08 -16.9 2.9

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