Old favourites lose ground in Russell’s Australia high dividend index reconstitution
- Defensive stocks and financials dominate high dividend index
- Fosters and Telstra were down weighted
Defensive stocks have proved to be the best choice for dividend yields in the Russell Australia High Dividend Index reconstitution, while old favourites such as Fosters, Qantas and Telstra were down-weighted. The reconstitution has added eight new high-yield stocks mainly in consumer discretionary, energy, materials and processing sectors, but financial stocks (including REITs) dominate its top ten exposures.
The Russell Australia High Dividend Index (RAHDI) comprises Australian blue-chip companies with a bias towards those that have a high expected dividend yield. The companies within the index also meet other characteristics including: a history of paying dividends; dividend growth and consistent earnings. This was the first annual reconstitution of the RAHDI, since it was launched earlier this year by Russell Investments, one of the world’s largest index providers. The index forms the basis of Russell’s High Dividend Australian Shares ETF (RDV), listed on the ASX.
Defensive stocks like Metcash, Goodman Fielder, Transurban, QBE and Tab Corporation rated well. “Overall RAHDI has a 10% higher exposure to defensive names than the broader market1, so it’s not surprising that these defensive favourites figure highly,” said Scott Bennett, portfolio manager at Russell Investments. “Goodman Fielder for example increased its weighting due to its high forecast yield (over 8% after franking credits) and more defensive qualities.”
Meanwhile the index reduced exposure to Fosters and Qantas following dividend cuts in the August reporting season. “While they are expected to resume dividends in 2011, there are other companies that carry a higher weight in the index,” said Mr Bennett.
Telstra was also not favoured despite its high yield. “Telstra continues to trade on an extreme yield of 14.5%2 after franking credits have been included. It is likely to experience reduced margins in its mobile phone, which the market is anticipating will put pressure on its dividend going forward. RAHDI is specifically designed not to chase companies that are trading on extreme yields and, as a result, Telstra continues to be held only at market weight,” Mr Bennett said.
Financials dominate but shift towards real estate
Sector-wise, financials still have the largest overall exposure, making up 48.3% of the index, based on that sector’s high dividend yields. However, at the September reconstitution there was a shift away from banks and into real estate investment trusts (REITs), with increased exposure in Stockland, Mirvac and CFS Retail Property Trust.
“Yields on REITs are beginning to look more attractive as they restore their balance sheets and reduce gearing, allowing them to focus on returning income to shareholders,” said Mr Bennett.
Materials had the biggest turnover with three companies added: Incitec Pivot, Newcrest Mining and Sims Metal Manangement while two were removed: Aquarius Platinum and Oz Minerals. “Within the metals and mining sector, the steel companies, Bluescope and Onesteel, are rating the best with both companies expected to grow their dividends significantly over the next three years,” said Mr Bennett.
The one-year forward yield on the Russell Australia High Dividend Index after the reconstitution is 7.2%, (gross with franking credits). After taking into account franking credits the Russell Australia High Dividend Index is currently trading at a 1.5% premium over the broader Australian sharemarket yield.
The Russell High Dividend Australian Shares ETF (RDV) has now added $69 million under management as at 18 October 2010.
The Russell High Dividend Australian Shares ETF tracks an index that is weighted towards companies that are expected to deliver dividends higher than the market average, however high dividends cannot be guaranteed.
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