Investing in today’s climate can be daunting, especially when the market’s reaction to news feels completely counterintuitive.
In all the noise, investors are trying to value tech companies that have seen phenomenal share price growth despite never having turned a profit, and are contending with the fact that bad macro-economic news is often actually good news because it means interest rates will most likely stay lower for longer. And then there are questions around sustainability and whether or not the extremely volatile cryptocurrency market is worth a punt.
At CoreShares, in times like these, we prefer to dial down the noise and focus on investments with strong fundamentals. One of the best ways to evaluate a company’s health, and to screen investment options, is to focus on cashflows.
Reliable dividend payers
Many stock selectors prioritise cashflow metrics above all other considerations when analysing companies. This is because cashflows are very difficult to manipulate, and cashflow issues are usually one of the earliest warning signs that a business is in trouble.
On the other hand, highly cash generative companies are well placed to consistently return cash to shareholders in the form of dividends. Businesses in this category tend to have disciplined management teams and proven business models. This implies quality, which makes them attractive assets.
Many investors favour companies that reliably pay out dividends year after year, because they are likely to yield a steady income stream long into the future.
Systematic company selection
A stock index that selects shares based on their dividend payout histories is comparable to something that highly-paid active managers have been doing for decades, but delivered at a lower cost.
Dividend-focused indices allow investors to access this type of strategy while keeping costs in check – an important element of outperformance.
For example, the CoreShares Global Dividend Aristocrats ETF has delivered about 1.5% more yield over the last year when compared to the average yield of the ASISA Global Equity category. The TER of this ETF is 65bps, far below the average fund fee in this category of 1.47%.
In other words, these investment strategies are popular because they tend to deliver better outcomes to investors at lower costs.
High yield vs consistent yield
It’s important to distinguish between two types of dividend strategies. A high-yield strategy seeks shares with the highest yields (yield being the dividend per share divided by the share price). This method can be problematic, since it could point to shares that have experienced a drop in their price, thus leading to a high yield. These stocks are typically called ‘value’ shares: Like shopping on sale, the price has been lowered, although this does not necessarily give you any comfort around the quality of what you are buying.
The alternative method is to screen for companies that have produced stable or growing dividends for an extended period. This measure of discipline and consistency over time tends to be a good indication of a high-quality company. Companies that pay consistent, growing dividends have robust, less cyclical earnings and tend to be more cash generative, with strong balance sheets and low levels of debt.
At CoreShares, we prefer the latter approach. The CoreShares Global Dividend Aristocrats ETF tracks the S&P Dividend Aristocrats Index, which is designed to do exactly that.
The index is weighted towards household names we know and trust, such as Coca-Cola, PepsiCo, McDonald’s, Johnson & Johnson, Nestle, Lindt, Colgate-Palmolive, and S&P Global Inc. For example, McDonald’s has consistently grown its dividends each year since 1977 – even during periods of economic hardship.
How does this fund fit into a portfolio and who should consider investing?
ETFs are efficient and cost effective, and are suitable for any type of portfolio or investor, including both retail and large institutional investors. They are a useful tool for asset allocation, both as a long-term holding or as a short-term portfolio management tool (for example, to equitise cash flows or to tactically over- or under-weight a particular allocation).
The CoreShares Global Dividend Aristocrats ETF is especially suited to investors who want the upside participation in equity markets but prefer a defensive tilt to their equity allocation, due to its non-cyclical nature. It also appeals to those who require an income from their investments, including people who are planning for retirement.
It is important to remember that many local investors who buy global strategies are looking for a relatively safe and stable investment – almost like an insurance policy against South Africa-specific risks. A more defensive strategy suits that purpose extremely well.
The CoreShares Global Dividend Aristocrats ETF is liquid, transparent and well diversified.