Among the biggest investor-driven trends in the market right now is the thirst for yield. The paltry yields available in most sectors of fixed income just are not providing the type of income that investors are looking for and so they are increasingly looking at earning that yield from dividend-paying stocks. However, an exclusive focus on yield provides an incomplete picture of the returns that an investor may achieve. There is also the performance of the stock itself that must be factored into the evaluation.
When we rank our universe of securities to construct the First Trust Dorsey Wright Dividend UITs, our relative strength ranks are determined by the total return of the stocks (price return + yield). For comparison’s sake, consider the construction methodology of the S&P Dividend SPDR (SDY) which is based upon the S&P High Yield Dividend Aristocrats Index. That index is designed to measure the performance of the highest dividend yielding S&P Composite 1500 Index constituents that have followed a managed-dividends policy of consistently increasing dividends every year for at least 20 consecutive years.
In the table below, I show the top 10 holdings for both SDY and for the First Trust Dorsey Wright Dividend UIT, Series 9. While the top 10 holdings for SDY have a slightly higher yield, the top 10 holdings of the Dorsey Wright UIT have had better total returns over the past 12 months.
Source: AllETF.com and First Trust; Performance Source: Yahoo! Finance
Evaluating dividend-paying stocks from a total return perspective seems to be fairly uncommon, yet it can make a significant difference in performance for the client while still allowing them to seek above-market yields.
Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss. See http://www.ftportfolios.com for more information.
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[…] to those stocks that not only have high dividend yields, but are also technically strong. Click here to read more about why we use rankings based on total return (price + yield) to identify holdings […]
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