The 2011 reporting season has rewarded investors with dividends as companies unload excess cash from their balance sheets in the face of a lower growth environment according to new data released by Russell Investments.
This season the market has delivered a 9% increase in dividends to investors compared to the previous reporting season. The growth has been captured by Russell’s high dividend and high value indexes as per data from the semi-annual reconstitution of these indexes, released today.
The Russell Australia High Dividend Index, which forms the basis of the Russell High Dividend Australian Shares ETF (RDV), has benefitted from the dividend growth by capturing companies with an emphasis on forward looking dividends and those with more stable earnings profiles. A table of the new top holdings in both indexes is included in the notes to editors.
“In this period of lower growth forecasts and heightened volatility, companies are taking the prudent approach and returning capital to shareholders instead of reinvesting cash. This has resulted in Australian companies delivering actual income for investors,” said Scott Bennett, Russell Portfolio Manager.
For investors in RDV this has provided an additional 2% (including franking credits) in income than the market, well above current term deposit rates. Some of the surprising income performers identified in the semi-annual reconstitution of the Russell Australia High Dividend Index are:
- BHP – increased its dividends as a result of the April buyback and confirmed strong dividends going forward. This is consistent with the RDV index methodology of increasing exposure to companies with solid dividend prospects.
- Newcrest – paid a dividend of $0.20 per share and announced a special dividend of $0.20. While noting the yield on Newcrest is still low, its dividend has benefitted from the stronger price of gold. Newcrest has had strong dividend growth over the last five years rising from $0.05/share to $0.50/share.
- Coal & Allied Industries (CNA) – CNA accepted a joint takeover bid which will result in a grossed up dividend of $11.42 per share, with a share price of $122.50 providing an attractive 10% dividend.
Value to be found in resources as financials lose “cheap” appeal
Regarding the Russell Australia High Value Index, Mr Bennett said the index has been selling down its exposure to banks which have recently outperformed the market and instead buying into resources which have recently underperformed.
“In stock movements this translates into buys of BHP and Rio and selling down the banks, in-line with our strategy of providing investors with an easy access point to a disciplined buy low, sell high, investment strategy,” he said.
The index, designed to systematically buy companies trading “cheaper” and sell those whose prices look “expensive” relative to the broader market, had recently changed its position from earlier in the year as the value opportunities shifted.
“Contrary to the direction taken by many investors earlier in the year, Russell’s High Value Index saw value in financials at a time when market watchers were shying away, and went underweight resources while they were experiencing a rally,” Mr Bennett said.
The strategy has paid off with the index outperforming the broader market since its launch in April 2011.
Russell ETFs outperform
The strong performance of Russell’s proprietary indexes has also helped its custom built ETFs – the Russell High Dividend Australian Shares ETF (RDV) and Australian Value ETF (RVL) – to outperform the broader market. RDV has delivered investors a 7% yield (annualised) before franking credits, close to 2% more than the broader market. And RVL, launched in April, has outperformed the broader market by 0.8% by identifying relatively cheap and undervalued stocks.
“The performance of Russell’s ETFs shows us even during trying market conditions, there are other opportunities for investors than traditional capitalisation weighted indexes,” Mr Bennett concluded.
