Based on the observation that assets generating higher yields tend to outperform, dividend yield strategies in the equity markets have become very popular with investors. No wonder, then, that there are a lot of passive offerings in this space.
How to evaluate them?
When considering passive yield strategies, we think investors should keep a few things in mind.
The profits generated by a company can be returned to shareholders either by paying out dividends or conducting a share buy-back program. When an investor wants to pursue an equity yield strategy, it makes more sense to take a holistic view and incorporate both factors.
Focusing on only one or the other could, among other things, lead to sectorial biases as certain industries tend to pay out dividends (e.g. utilities) while others focus on buybacks (e.g. IT companies).
An index employing these principles is the MSCI Total Shareholder Yield index. It ranks stocks using a composite score incorporating dividend, buyback and debt-reduction so as to account for all sources of yield. (The latter is based on the idea that the yield in dividend strategies should come from companies' profits and not because of debt accumulation.)
This approach has historically worked quite well, outperforming its parent index by more than 100 basis points per annum over the last 10 years.
Certainly something for investors to keep in mind.