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Combining dividend paying stocks with low volatility ones

Jun. 30, 2013

Speaker : Dr. Elton Babameto, Research and Product Development, STOXX Ltd.

Jun. 30, 2013 Speaker : Dr. Elton Babameto, Research and Product Development, STOXX Ltd.

Investors have been showing a strong interest in certain themes like dividends and low volatility. The purpose of this document is to investigate the possibility of enhancing the historical performance of the STOXX Europe Select Dividend 30 Index by complementing it with a straightforward low volatility screen. This “hybrid” dividend and low volatility approach has produced encouraging performance during the period between March 2008 and March 2013.

In the wake of the credit crisis which swept the globe in 2008, interest in decade-old investment themes has been reinforced whilst renewed focus on dealing with stock market volatility has been at the top of investors’ agenda ever since. The case for investing in dividend paying stocks is very straightforward: In general, companies that pay dividends regularly demonstrate not only an ability to turn in a profit but also confidence in the future of their business operations. No surprise then that such companies are a strong magnet for investors. Dividend yield (i.e. the ratio between the dividend paid and the share price) is a key metric when evaluating competing stock investments. The higher the yield - all other things being equal - the more attractive a stock is considered to be. Further, when dividend yields are higher relative to sovereign and corporate paper, the investment case for dividend paying stocks becomes even more compelling. The world’s central banks have certainly helped in this regard through their quantitative easing and exceptionally low rate policies. Such policies have aimed at kick-starting economic growth by encouraging the private sector to invest rather than park their excess reserves in low yielding fixed-income assets. Thanks to such policy-driven re-pricing of risk, interest in the dividend yield theme has received an extra shot in the arm over the last few years. As a result, there has been a global proliferation of investment vehicles that allocate money to dividend paying baskets. In turn, these investments are constructed and evaluated against a vast array of indices and benchmarks that the indexing industry has produced in order to facilitate the process. According to the ETF database (www.etfdb.com), the biggest global dividend-themed ETFs collectively have about $50bn in assets under management. Obviously, this is only the tip of the iceberg because such a figure excludes the amount of money that is managed actively in this space. In short, investors are allocating considerable amounts of money to dividend-paying stocks. STOXX has a range of dividend indices which mirror investment opportunities in different markets and geographies. A case in point is the STOXX Europe Select Dividend 30 (that selects stocks from the underlying STOXX Europe 600 index) which is widely followed by investors that are specifically focused on European dividend paying companies.

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