Global X Research TeamOn July 17th, the Global X S&P 500® Quality Dividend ETF (QDIV) began trading on the CBOE. QDIV invests in U.S. equity securities included in the S&P 500® Index that rank within the top 200 of the index’s universe by both quality score and dividend yield.
In June, the Federal Reserve (Fed) raised interest rates for the 7th time since the financial crisis and indicated it was on pace for two more rate increases in 2018. For income-seeking investors, the rising interest rate environment has created a conundrum: while bond yields are finally becoming more attractive after years of historically low rates, the value of the principal of these instruments is under threat as interest rates are expected to march higher. One solution is for investors to look at other sources of income, such as dividend paying stocks. Dividend stocks may not only provide a more tax-advantaged income stream to investors than fixed-income coupon payments, but they also have the potential to appreciate in value as the economy strengthens. Dividends can be taxed at qualified dividend rates whereas fixed income coupon payments are typically taxed at higher ordinary income rates.
A Look at Dividend Styles
We have previously written about how dividend investing is not one-size fits all. Given the breadth of stocks that pay dividends, there are a variety of strategies that can be implemented to target different groups of dividend payers based on certain characteristics, like screening for those with the highest dividend yields, strong quality metrics, or a history of growing their dividends. The potential yields, risk/return characteristics, and sector exposures for each of these dividend styles can vary significantly from one another, meaning they can play distinct roles in a portfolio.
Source: Global X Research, “Approaching the Dividend Space.”
Since 2011, Global X has developed a suite of SuperDividend ETFs that fit the ‘high dividend’ category by targeting the highest dividend payers in various geographies and asset classes. With the launch of QDIV, we are extending our lineup of dividend ETFs to now include a US large cap fund focused on the quality dividend category.
How QDIV Works
QDIV tracks the S&P 500® Quality High Dividend Index, which selects stocks using the following process: It ranks S&P 500 companies by both quality score (based on return-on-equity, accruals ratio, and financial leverage) and by indicated annual dividend yield. The companies selected for inclusion in the index are those that rank in the top 200 (roughly top 40%) of both quality score and dividend yield. Components are equally weighted, with individual sector exposures capped at 25%.
We believe QDIV can be used for core US equity exposure in a portfolio seeking dividend income from companies that score well on quality metrics like return-on-equity, accruals ratio, and financial leverage. It can also be used in combination with other dividend strategies, such as high dividend yield, by helping to balance a portfolio’s exposure and add more defensive characteristics.
Related ETFs
QDIV: The Global X S&P 500® Quality Dividend ETF invests in U.S. equity securities included in the S&P 500® Index that rank within the top 200 of the index’s universe by both quality score and dividend yield.
DIV: The Global X SuperDividend® U.S. ETF invests in 50 of the highest dividend yielding equity securities in the United States.
SDIV: The Global X SuperDividend® ETF invests in 100 of the highest dividend yielding equity securities in the world.