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- Recent market volatility has left equity investors with few opportunities for protection and questioning the stability of dividend income streams.
- We believe that strategies such as the Dividend Aristocrats, which focus on dividend stability, could be well positioned for the current environment
Dividend Strategy Performance Remains Challenged
The coordinated nature of recent equity market pullbacks has adversely affected the selective nature of the Dividend Aristocrats index strategies. During broad sell-offs, it’s harder for defensive smart beta funds to provide the same downside protection they have historically demonstrated. The recent market pullback saw the MSCI World Index sell off 30.67% in less than a month (28 days). During this decline, the difference between the best performing sector (Consumer Staples) and the market was only 13.58%.1
The speed and narrowness of this market pullback, as well as the large accumulation of cash holdings, suggests a market that is not trading on fundamentals. The few stocks that have delivered relatively strong performance have an idiosyncratic benefit tied to the short-term reaction to the COVID-19 outbreak. This was largely concentrated in the Consumer Staples, Technology and Health Care sectors.
Specific names in Consumer Staples benefitted from a stockpiling of household goods ahead of global societal shutdowns to combat further spread of the virus. During the 28-day pull back in MSCI World, the Household & Personal Products Industry Group only sold off 8.57%. Meanwhile, specific growth stocks in Technology (work-from-home plays) and Health Care (drug/treatment development) provided some benefit to the market cap weighted benchmarks relative to dividend yield factor indices
We believe factor investors should position for a market that will resume trading on longer-term fundamentals. As the economic disruptions of the global pandemic continue to threaten dividends, the Dividend Aristocrats methodology is uniquely suited to target the most stable dividend payers.
Some sectors have been hit especially hard in the downturn. Energy stocks have collapsed as a result of falling demand and a lack of coordinated production cuts. Even the largest, best capitalised Energy firms, with impressive track records of established dividend programs, have not been immune to pullbacks. Many investors expect these firms to recover once we see resolution in the economic imbalance, provided they can continue to service debt. In the short term, investors worry that firms will need to cut dividend payments.
On 7 April, Exxon2 announced it was embarking on a plan to cut its capital spending by 30% in order to combat oil price headwinds, which have hurt the stock price. Importantly, the CEO reaffirmed the company’s commitment to supporting the dividend program, even if it required the use of its balance sheet to support the cash distributions.3 While this is somewhat anecdotal, is does highlight the primary selection criteria of the S&P High Yield Dividend Aristocrats Index – companies that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 years.
Figures 3-5 (appendix) contain detailed attribution (by sector) of the performance of US, eurozone and UK dividend exposures during the recent pullback.
European Regulators Move to Encourage Suspending Dividend Payments
In an environment where increasing social disruption has shocked the real economy, income investors are increasingly concerned about dividend stability. The drop in consumer demand at a time of high corporate debt levels has caused many investors to question whether companies will continue to generate the cash flows needed to return regular cash dividends to shareholders.
Additionally, as government bodies step in to help businesses weather the storm, some are explicitly calling for those businesses to hoard cash by suspending dividends to investors. On 27 March, the European Central Bank issued a recommendation to European banks to refrain from making dividend distributions until at least 1 October 2020.4
The Bank of England issued a similar request to UK banks at the end of March, which the country’s largest banks agreed to obey. Although, the regulator acknowledged that they “do not expect the capital preserved to be needed by the banks in order to maintain adequate capital positions,” in a statement issued on 31 March.5
While these regulatory actions will impact the dividend capacity of European banks, across the United Kingdom and eurozone, the SPDR® S&P® Euro Dividend Aristocrats UCITS ETF (13.3% Financials) and SPDR® S&P® UK Dividend Aristocrats UCITS ETF (27.1% Financials) may experience less of a threat to their dividends. The Financials exposure in each of these funds is largely skewed towards the insurance (Euro 13.3% and UK 8.25%) and capital markets (UK 16.4%) industries, which may have more capacity to maintain dividends.6
The foundation of the Dividend Aristocrats strategies is the long-term dividend track record. For this reason, while constituents in these strategies will not be immune from dividend cuts, it is as important as ever that investors recognise the value of dividend stability. This family of indices is uniquely positioned for the current environment, as it selects companies where the management teams have a demonstrated commitment of seeking to preserve regular cash dividends.
The Dividend Aristocrats Methodology Targets Dividend Stability
The primary stock selection component of the Dividend Aristocrats family of strategies is long-term track record (5-20 consecutive years) of maintaining (or raising) the regular cash dividend delivered to shareholders. Figure 2 (below) provides a detailed overview of the index construction.
In addition to this high standard of dividend stability for stock selection, the methodology also includes a process called Monthly Dividend Review, as part of the index maintenance rules. This process is designed to remove companies at month-end that meet either of the following conditions, on the applicable reference date:8
• The constituent stock publicly announces a suspension or cancellation of its dividend program.
• The constituent stock lowers but does not eliminate its dividend, and its new yield is significantly lower than the lowest yielding constituent.
In the event a stock is removed as a result of the Monthly Dividend Review, the stock is replaced at month-end (in the case of the Euro and UK strategies) or during the next annual reconstitution (US, Global, Pan Asia and Emerging Markets). The decision to remove any index constituent sits with the S&P Dow Jones Indices (“S&P DJI”) Index Committee.
In a FAQ published by S&P DJI on 31 March 2020, the index provider issued some important clarifications on the application of their index methodology, given the current market environment. S&P DJI will continue to reconstitute its dividend indices according to the published index methodology.
Many of the indices have specified target constituent counts and additional weighting rules for diversification included in their rebalance processes documented in their applicable methodologies. In the event the rules as detailed in the index methodology cannot be met, the Index Committee will review the results and determine if discretion needs to be exercised to ensure the applicable Index continues to meet its stated objective.10
For more information on the ETFs referenced in this note, including full performance histories, please view their fund pages:
1Source: State Street Global Advisors, FactSet as of 31 March 2020.
2Exxon Mobil Corporation (XOM-US) is the 9th largest holding in the SPDR® S&P® U.S. Dividend Aristocrats UCITS ETF. Source: State Street Global Advisors, spdrs.com as of 6 April 2020.
3Stevens, Pippa (CNBC). Markets: Exxon cuts capital spending by 30%, but CEO says it’s ‘committed to maintaining’ dividend, published 7th April 2020. (Link) 4Lagarde, Christine (ECB). Recommendation of the European Central Bank of 27 March 2020.
5Bank of England. PRA statement on deposit takers’ approach to dividend payments, share buybacks and cash bonuses in response to Covid-19, published 31 March 2020.
6Source: State Street Global Advisors, ssga.com as of 6 April 2020.
7Please refer to each index methodology for the specific details of the Monthly Dividend Review.
8The decision to remove an index constituent is based on information publicly announced by the company as of seven (7) business days prior to month-end.
9Euro and UK ONLY: The replacement stock is the highest ranked eligible non-constituent using data as of the last business day of the previous month. Replacement stocks are added at the same weight as the stock it is replacing.
10S&P Dow Jones Indices FAQ March 2020.
Marketing Communication. For Professional Client Use Only.
For Investors in Austria: The offering of SPDR ETFs by the Company has been notified to the Financial Markets Authority (FMA) in accordance with section 139 of the Austrian Investment Funds Act. Prospective investors may obtain the current sales Prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400. F+49 (0)89-55878-440.
Finland: The offering of funds by the Companies has been notified to the Financial Supervision Authority in accordance with Section 127 of the Act on Common Funds (29.1.1999/48) and by virtue of confirmation from the Financial Supervision Authority the Companies may publicly distribute their Shares in Finland. Certain information and documents that the Companies must publish in Ireland pursuant to applicable Irish law are translated into Finnish and are available for Finnish investors by contacting State Street Custodial Services (Ireland) Limited, 78 Sir John Rogerson’s Quay, Dublin 2, Ireland.
France: This document does not constitute an offer or request to purchase shares in the Companies. Any subscription for shares shall be ade in accordance with the terms and conditions specified in the complete Prospectuses, the KIID, the addenda as well as the Companies’ Supplements. These documents are available from the Company centralising correspondent: State Street Banque S.A., 23-25 rue Delariviere- Lefoullon, 92064 Paris La Defense Cedex or on the French part of the site spdrs.com. The Companies re undertakings for collective investment in transferable securities (UCITS) governed by Irish law and accredited by the Central Bank of Ireland as a UCITS n accordance with European Regulations. European Directive no. 2014/91/ EU dated 23 July 2014 on UCITS, as amended, established common rules pursuant to the cross-border marketing of UCITS with which they duly comply. This common base does not exclude differentiated implementation. This is why a European UCITS can be sold in France even though its activity does not comply with rules identical to those governing the approval of this type of product in France. The offering of these compartments has been notified to the Autorité des Marchés Financiers (AMF) in accordance with article L214- 2-2 of the French Monetary and Financial Code.
Germany: The offering of SPDR ETFs by the Companies has been notified to the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin) in accordance with section 312 of the German Investment Act. Prospective investors may obtain the current sales Prospectuses, the articles of incorporation, the KIIDs as well as the latest annual and semiannual report free of charge from State Street Global Advisors GmbH, Brienner Strasse 59, D-80333 Munich. T: +49 (0)89-55878-400.
Ireland: State Street Global Advisors Ireland Limited is regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered number 145221. T: +353 (0)1 776 3000. F: +353 (0)1 776 3300. Web: ssga.com.
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Accordingly, the Securities shall only be sold in Israel to an investor of the type listed in the First Schedule to the Israeli Securities Law, 1978, which has confirmed in writing that it falls within one of the categories listed therein (accompanied by external confirmation where this is required under ISA guidelines), that it is aware of the implications of being considered such an investor and consents thereto, and further that the Securities are being purchased for its own account and not for the purpose of re-sale or distribution.
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Nothing in this sales brochure should be considered investment advice or investment marketing as defined in the Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 1995 (“the Investment Advice Law”). Investors are encouraged to seek competent investment advice from a locally licensed investment advisor prior to making any investment. State Street is not licensed under the Investment Advice Law, nor does it carry the insurance as required of a licensee thereunder.
This sales brochure does not constitute an offer to sell or solicitation of an offer to buy any securities other than the Securities offered hereby, nor does it constitute an offer to sell to or solicitation of an offer to buy from any person or persons in any state or other jurisdiction in which such offer or solicitation would be unlawful, or in which the person making such offer or solicitation is not qualified to do so, or to a person or persons to whom it is unlawful to make such offer or solicitation.
Italy: State Street Global Advisors Limited, Milan Branch (Sede Secondaria di Milano) is a branch of State Street Global Advisors Ireland Limited, registered in Ireland with company number 145221, authorised and regulated by the Central Bank of Ireland, and whose registered office is at 78 Sir John Rogerson’s Quay, Dublin 2, with a capital of GBP 62’350’000, and whose registered office is at 20 Churchill Place, London E14 5HJ. State Street Global Advisors Limited, Milan Branch (Sede Secondaria di Milano), is registered in Italy with company number 06353340968 - R.E.A. 1887090 and VAT number 06353340968 and whose office is at Via dei Bossi, 4 - 20121 Milano, Italy. T: 39 02 32066 100. F: 39 02 32066 155.
Luxembourg: The Companies have been notified to the Commission de Surveillance du Secteur Financier in Luxembourg in order to market its shares for sale to the public in Luxembourg and the Companies are notified Undertakings in Collective Investment for Transferable Securities (UCITS).
Netherlands: This communication is directed at qualified investors within the meaning of Section 2:72 of the Dutch Financial Markets Supervision Act (Wet op het financieel toezicht) as amended. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Distribution of this document does not trigger a licence requirement for the Companies or SSGA in the Netherlands and consequently no prudential and conduct of business supervision will be exercised over the Companies or SSGA by the Dutch Central Bank (De Nederlandsche Bank N.V.) and the Dutch Authority for the Financial Markets (Stichting Autoriteit Financiële Markten). The Companies have completed their notification to the Authority Financial Markets in the Netherlands in order to market their shares for sale to the public in the Netherlands and the Companies are, accordingly, investment institutions (beleggingsinstellingen) according to Section 2:72 Dutch Financial Markets Supervision Act of Investment Institutions.
Norway: The offering of SPDR ETFs by the Companies has been notified to the Financial Supervisory Authority of Norway (Finanstilsynet) in accordance with applicable Norwegian Securities Funds legislation. By virtue of a confirmation letter from the Financial Supervisory Authority dated 28 March 2013 (16 October 2013 for umbrella II) the Companies may market and sell their shares in Norway.
Spain: State Street Global Advisors SPDR ETFs Europe I and II plc have been authorised for public distribution in Spain and are registered with the Spanish Securities Market Commission (Comisión Nacional del Mercado de Valores) under no.1244 and no.1242. Before investing, investors may obtain a copy of the Prospectus and Key Investor Information Documents, the Marketing Memoranda, the fund rules or instruments of incorporation as well as the annual and semi-annual reports of State Street Global Advisors SPDR ETFs Europe I and II plc from Cecabank, S.A. Alcalá 27, 28014 Madrid (Spain) who is the Spanish Representative, Paying Agent and distributor in Spain or at spdrs.com. The authorised Spanish distributor of State Street Global Advisors SPDR ETFs is available on the website of the Securities Market Commission (Comisión Nacional del Mercado de Valores).
Switzerland: The collective investment schemes referred to herein are collective investment schemes under Irish law. Prospective investors may obtain the current sales prospectus, the articles of incorporation, the KIID as well as the latest annual and semi-annual reports free of charge from the Swiss Representative and Paying Agent, State Street Bank International GmbH, Munich, Zurich Branch, Beethovenstrasse 19, 8027 Zurich as well as from the main distributor in Switzerland, State Street Global Advisors AG, Beethovenstrasse 19, 8027 Zurich. Before investing please read the prospectus and the KIID, copies of which can be obtained from the Swiss representative, or at ssga.com.
United Kingdom: The Companies are recognised schemes under Section 264 of the Financial Services and Markets Act 2000 (“the Act”) and are directed at ‘professional clients’ in the UK (within the meaning of the rules of the Act) who are deemed both knowledgeable and experienced in matters relating to investments. The products and services to which this communication relates are only available to such persons and persons of any other description should not rely on this communication. Many of the protections provided by the UK regulatory system do not apply to the operation of the Companies, and compensation will not be available under the UK Financial Services Compensation Scheme.
This document has been issued by State Street Global Advisors Ireland (“SSGA”), regulated by the Central Bank of Ireland. Registered office address 78 Sir John Rogerson’s Quay, Dublin 2. Registered number 145221. T: +353 (0)1 776 3000. Fax: +353 (0)1 776 3300. Web: ssga.com.
SPDR ETFs is the exchange traded funds (“ETF”) platform of State Street Global Advisors and is comprised of funds that have been authorised by Central Bank of Ireland as open-ended UCITS investment companies.
State Street Global Advisors SPDR ETFs Europe I & SPDR ETFs Europe II plc issue SPDR ETFs, and is an open-ended investment company with variable capital having segregated liability between its sub-funds. The Company is organised as an Undertaking for Collective Investments in Transferable Securities (UCITS) under the laws of Ireland and authorised as a UCITS by the Central Bank of Ireland.
The information provided does not constitute investment advice. It should not be considered a solicitation to buy or an offer to sell any investment. It does not take into account any investor’s or potential investor’s particular investment objectives, strategies, tax status, risk appetite or investment horizon. If you require investment advice you should consult your tax and financial or other professional advisor. All information is from SSGA unless otherwise noted and has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
ETFs trade like stocks, are subject to investment risk and will fluctuate in market value. The investment return and principal value of an investment will fluctuate in value, so that when shares are sold or redeemed, they may be worth more or less than when they were purchased. Although shares may be bought or sold on an exchange through any brokerage account, shares are not individually redeemable from the fund. Investors may acquire shares and tender them for redemption through the fund in large aggregations known as “creation units.” Please see the fund’s prospectus for more details.
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Standard & Poor’s, S&P and SPDR are registered trademarks of Standard & Poor’s Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation’s financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
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The ETFs listed above have historically paid dividends to investors and/or invest in the securities of dividend paying issuers; however, there is no guarantee that these ETFs will consistently pay dividends to investors in the future or will appreciate in value. Investors could lose money by investing in ETFs.
A Smart Beta strategy does not seek to replicate the performance of a specified cap-weighted index and as such may underperform such an index. The factors to which a Smart Beta strategy seeks to deliver exposure may themselves undergo cyclical performance. As such, a Smart Beta strategy may underperform the market or other Smart Beta strategies exposed to similar or other targeted factors. In fact, we believe that factor premia accrue over the long term (5–10 years), and investors must keep that long time horizon in mind when investing.
The information contained in this communication is not a research recommendation or ‘investment research’ and is classified as a ‘Marketing Communication’ in accordance with the Markets in Financial Instruments Directive (2014/65/EU) or applicable Swiss Regulation. This means that this marketing communication (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research (b) is not subject to any prohibition on dealing ahead of the dissemination of investment research.
You should obtain and read the SPDR prospectus and relevant Key Investor Information Document (KIID) prior to investing, which may be obtained from spdrs.com. These include further details relating to the SPDR funds, including information relating to costs, risks and where the funds are authorised for sale.
SPDR ETF is the exchange traded funds ("ETF") platform of State Street Global Advisors and is comprised of funds that have been authorised by European regulatory authorities as open-ended UCITS investment companies. SPDR ETFs may not be available or suitable for you.
ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns.
Changes in exchange rates may have an adverse effect on the value, price or income of an investment. Further, there is no guarantee an ETF will achieve its investment objective.
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Standard & Poor's®, S&P® and SPDR® are registered trademarks of Standard & Poor's Financial Services LLC (S&P); Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (Dow Jones); and these trademarks have been licensed for use by S&P Dow Jones Indices LLC (SPDJI) and sublicensed for certain purposes by State Street Corporation. State Street Corporation's financial products are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, their respective affiliates and third party licensors and none of such parties make any representation regarding the advisability of investing in such product(s) nor do they have any liability in relation thereto, including for any errors, omissions, or interruptions of any index.
SPDR ETFs may be offered and sold only in those jurisdictions where authorised, in compliance with applicable regulations.
Information related to Mexico
This information does not constitute and is not intended to constitute marketing or an offer of securities and accordingly should not be construed as such. The Funds referenced herein have not been, and will not be, registered under the Mexican Securities Market Law (Ley del Mercado de Valores) and may not be publicly offered or sold in the United Mexican States. Disclosure documentation related to any of the aforementioned Funds may not be distributed publicly in Mexico and shares of the Funds may not be traded in Mexico.
You should obtain and read a prospectus and KIID relating to the SPDR ETFs prior to investing. Further information and the prospectus/KIID describing the characteristics, costs and risks of SPDR ETFs are available for residents of countries where SPDR ETFs are authorised for sale on the SPDRs website and from your local SSGA office.