ETF: Dividends for quality, not income

In ETF Blog, Latest by Kristia van Heerden

coreshares global dividend ETFYou’d be forgiven for thinking the CoreShares Global Dividend ETF (GLODIV) is a good bet for dividend income. It says “dividend” right on the sticker. You’d also be forgiven for being slightly disappointed when you receive a dividend payment from this ETF that’s not orders of magnitude higher than the dividends you earned on normal ETFs. Dividends form the core of this ETF’s methodology, but not in the way you might think.

The ETF methodology is based on the premise that high quality companies, the kinds of companies that have been around for generations, consistently pay a dividend. Since dividends are a share of a company’s profits, struggling companies can’t keep up with dividend payments.

Instead of including companies that pay a huge dividend, the ETF includes companies that pay a consistently growing dividend. In more established markets like America, a company has to have paid and increased its dividend payments for 25 years before being included in the ETF. Since a company has to be more than 25 years old to be included, you won’t see Google, Facebook or any rising stars in the ETF. You will recognise companies like Coca Cola, McDonalds and Johnson & Johnson. The strict dividend payment requirement therefore acts as a filter, excluding cyclical companies and fads. Companies with staying power provide services we need, no matter what the weather.

The GLODIV ETF is actually a combination of four dividend aristocrat indices representing different regions. Each index has to adhere to the same criteria, although the number of dividend-paying years differs by region. In addition to USA-listed companies, the ETF includes exposure to Europe, Canada and the Pan Asian market.

Since more mature companies are included in the ETF and since every company pays a dividend, you shouldn’t expect share price movements that will blow your hair back. However, you can expect a smoother ride during turbulent times. These companies have made it through market crises before and will likely continue to do so. Local investors can also benefit from the fact that  the ETF is dollar denominated. Exchange rate movements can have a positive impact on the price of the ETF.*

The four sub-indices combined will give you exposure to 275 solid, reliable companies in 24 countries. The ETF will pay its first dividend to local investors in June 2018.

*Of course they can have a negative impact too.

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