An investment strategy focused on creating sustainable yield will avoid
holding equities that are at risk of cutting their dividends and consider
the financial and operating strength of prospective holdings.
Specific emphasis should be placed on companies with strong balance sheets,
efficient operations, and the ability to generate cash flow. The Sphere
FTSE Sustainable Yield Index ETFs look at the following key criteria to
maximize the advantage of sustainable yield products:
Companies included in a portfolio need to consider the ability of a company
to pay their dividends on a sustainable basis.
Industries are cyclical, and their correlated movements can increase the
risk to high yield investors by exposing them to high levels of industry
bias. Sustainable yield strategies take industry-relative factors into
account to ensure a broader diversification across industries.
Global or regional high yield indices may have a country bias and lack
diversification. Sustainable yield strategies utilize country-relative
factors to ensure broader geographic exposure.
Low liquidity increases transaction costs for investors looking to enter or
exit the investment strategy. This risk can be moderated by a portfolio
construction process that uses appropriate weights for each portfolio
High yield strategies often use only the single yield factor to select its
portfolio holdings. This investment approach can be enhanced in two ways:
by utilizing multiple investment factors to build a portfolio and by using
transaction buffers so that portfolio turnover enhances the strategy’s risk
vs. return profile.
Investors would be wise to consider ETFs that address the risks and issues
listed above with a goal of exposing investors to a well-constructed
portfolio of equities that provide a high but sustainable dividend yield.
The methodology attempts to lower the exposure to companies that might cut
their dividend by avoiding those with extreme yields, as these companies
have been shown to be more likely to experience dividend cuts.
No dividend cuts:
Companies that have cut their dividend within the past 12 months have been
shown to be more likely to experience subsequent dividend cuts. As such, a
company that has cut its dividend over the past 12 months or has a
forecasted dividend cut cannot be added to the index.
Sustainable payout ratio:
Research has shown that companies paying dividends that are a high
percentage of their earnings are more likely to experience dividend cuts.
Investors should look to companies with a reasonable and sustainable payout
ratio to lower this risk.
Financial and operational strength:
Companies with weak financial and operational metrics and/or showing
weakening trends in these areas may be unable to generate sufficient cash
flow to offer a sustainable dividend payment. Ensuring that companies have
financial and operational strength and improving trends can help to avoid
Finding yield will continue to be a challenge for investors in 2017 and
beyond. Choosing ETFs that are focused on delivering a high, sustainable
and predictable yield will be critical to successful asset allocation.
is President and Chief Investment Officer at Sphere Investments. With more
than 20 years of equity investment analysis and portfolio management
experience, Keith has a long track record of successfully managing
billions of dollars of assets for some of Canada’s largest investment
This article first appeared in the Fall 2016 issue of
Your Guide to ETF Investing, published by Brights Roberts Inc. Reprinted with permission.
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