THIS IS AN ADVERTISING FEATURE
Investors have several options when looking for current income beyond traditional fixed income securities, including covered call strategies, preferred equities, and common stocks with attractive dividend yields. Different investors will take different paths within these broad categories, usually depending on their investment objectives, time horizons, and risk tolerances, among other factors. Depending on whether they’re used in a broader portfolio, high yielding dividend stocks can potentially provide a number of benefits, such as diversification, inflation hedging, and risk management.
Dividend Basics
Dividends are payments made by companies to eligible stockholders. Not all companies pay dividends, but those that do typically pay them in cash on a predetermined basis, such as monthly, quarterly, or annually. Most companies that pay dividends aren’t obligated to do so and can stop payments or change their dividend policies as they see fit. These decisions are generally made by the board of directors.
Given the lack of context that a dividend payment provides as a standalone figure, investors generally talk about dividends in terms of a stock’s yield. After all, getting a $1 annual dividend from a stock that you paid $10 for is a lot different than getting the same $1 payment from a stock you paid $100 for. The formula for dividend yield is simply 12 months of dividend payments divided by the stock’s price, multiplied by 100. So, in our above example, this would equate to a yield of 10% for the former and 1% for the latter.
Where High Yields Are Typically Found
Investors with a more conservative bent may gravitate toward high-quality dividend stocks. For instance, they may balance the search for yield with screens for other factors such as return on equity, accruals ratio, and financial leverage. Others will focus more on pure yield with less regard to industry, market capitalization, country of domicile, or quality metrics.
High-yielding equities can be found in any industry, though they tend to be concentrated in certain areas, such as financials, energy, and real estate. Companies that pay dividends tend to be mature with steady cash flows to support the payments. Young, high-growth companies generally do not pay dividends, as their capital is typically better used by reinvesting it back into the business or other growth opportunities.
Companies with stable earnings and cash flows can typically pay out a higher portion of their earnings. For these companies, the financial stability signaled by committing to pay regular cash dividends is typically worthwhile. Conversely, financial flexibility is generally more valued in innovative market segments where high levels of capital spending and research and development may be needed to establish a competitive advantage in a rapidly evolving segment.
Understanding REITs and MLPs
Real Estate Investment Trusts, or REITs, invest in physical real estate or mortgages with the primary goal of generating income for shareholders. In general, REITs receive favorable tax treatment in exchange for paying out most of their income to shareholders. This structure often results in REITs having high yields and being a common source of dividend income.
In addition to their attractive yields, REITs may be a good inflation hedge. For instance, a short duration contract, such as hotels, which set a nightly rate, allows prices to be adjusted very quickly in response to market pricing or inflation. Long-term lease agreements may contain rental escalation clauses, where the rental amount is increased periodically with inflation, thereby providing explicit inflation protection. In addition to the structure of rental contracts, the replacement cost of constructing a property can rise due to inflation in the cost of materials and labor. This could result in the price of properties being supported by inflation.
Master Limited Partnerships (MLPs), which cover the exploration, storage, and distribution of energy like crude and natural gas, can profit from higher energy prices and also tend to have high yields, as they have a similar structure to REITs in that they receive favorable tax treatment in exchange for paying out most of their income to shareholders.
Related ETF: Global X SuperDividend UCITS ETF (SDIV)
The Global X SuperDividend UCITS ETF offers high income potential and global exposure by investing in up to 100 of the highest yielding equities in the world. Among other criteria, eligible companies must have a share class market capitalization of at least $500 million and average daily turnover of at least $1 million over the last three months. They must also have primary listing in a developed market or an emerging market, excluding India, China, and Argentina. Additionally, stocks must have a dividend yield of at least 6% and less than 20% to be added, while current constituents must have a dividend yield of at least 3%. Distributions are made on a monthly basis (to the Distributing Share Class only).
Capital at risk: The value of an investment in ETFs may go down as well as up and past performance is not a reliable indicator of future performance.
The Global X UCITS ETFs are regulated by the Central Bank of Ireland.
This is a marketing communication.
Please refer to the relevant prospectus, supplement, and the Key Information Document (“KID”) of the relevant UCITS ETFs before making any final investment decisions.
Investors should also refer to the section entitled “Risk Factors” in the relevant prospectus of the UCITS ETFs in advance of any investment decision for information on the risks associated with an investment in the UCITS ETFs, and for details on portfolio transparency. The relevant prospectus and KID for the UCITS ETFs are available in English at www.globalxetfs.eu/funds.
Investment in the UCITS ETFs concern the purchase of shares in the UCITS ETFs and not in a given underlying asset such as a building or shares of a company, as these are only the underlying assets that may be owned by the UCITS ETFs.
A UCITS ETF’s shares purchased on the secondary market cannot usually be sold directly back to a UCITS ETF. Investors must buy and sell shares on a secondary market with the assistance of an intermediary (e.g. a stockbroker) and may incur fees for doing so. In addition, investors may pay more than the current net asset value when buying shares and may receive less than the current net asset value when selling them. Changes in exchange rates may have an adverse effect on the value price or income of the UCITS ETF.
Past performance of a UCITS ETF does not predict future returns. Future performance is subject to taxation which depends on the personal situation of each investor, and which may change in the future. Neither past experience nor the current situation are necessarily accurate guides to the future growth in value or rate of return of a UCITS ETF.
Investment may be subject to sudden and large falls in value, and, if it is the case, the investor could lose the total value of the initial investment. Income may fluctuate in accordance with market conditions and taxation arrangements. The difference at any one time between the sale and repurchase price of a share in the UCITS ETF means that the investment should be viewed as medium term to long term.
Any investment in a UCITS ETF may lead to a financial loss. The value of an investment can reduce as well as increase and, therefore, the return on the investment will be variable.
Global X ETFs ICAV is an open-ended Irish collective asset management vehicle issuing under the terms of its prospectus and relevant supplements as approved by the Central Bank of Ireland and is the issuer of certain of the ETFs where stated.
Global X ETFs ICAV II is an open-ended Irish collective asset management vehicle issuing under the terms of its prospectus and relevant supplements as approved by the Central Bank of Ireland and is the issuer of certain of the ETFs where stated.
Communications issued in the European Union relating to Global X UCITS ETFs are issued by Global X Management Company (Europe) Limited (“GXM Europe”) acting in its capacity as management company of Global X ETFs ICAV. GXM Europe is authorised and regulated by the Central Bank of Ireland. GXM Europe is registered in Ireland with registration number 711633.
Communications issued in the United Kingdom and Switzerland relating to Global X UCITS ETFs are issued by Global X Management Company (UK) Limited (“GXM UK”), which is authorised and regulated by the Financial Conduct Authority. The registered office of GXM UK is 77 Coleman Street, London, EC2R 5BJ, UK. Information about GXM UK can be found on the Financial Services Register (register number 965081).
Information for Investors in Switzerland
This is an advertising document. The state of the origin of the fund is Ireland. In Switzerland, the representative is 1741 Fund Solutions AG, Burggraben 16, CH-9000 St.Gallen. The paying agent is Tellco AG, Bahnhofstrasse 4, 6430 Schwyz.
The prospectus, the key information documents or the key investor information documents, the articles of association as well as the annual and semi-annual reports may be obtained free of charge from the representative.
Past performance is no indication of current or future performance. The performance data do not take account of the commissions and costs incurred on the issue and redemption of units.
