Introduction
Against the backdrop of nearly two decades of a zero interest-rate policy, it has been challenging for domestic market participants in Japan to search for a compelling yield in the fixed income space. Many income-seeking market participants started turning to the equity market for higher dividend yield (see Exhibit 1). Spurred by the new Nippon Individual Savings Account (NISA) tax-free policy on dividends and the Tokyo Stock Exchange (TSE) initiative to enhance shareholder returns, dividend-paying stocks have been gaining traction in Japan in recent years. According to the London Stock Exchange Group (LSEG), Japanese dividend funds attracted a net inflow of USD 4.18 billion in 2024, the highest since 2006. JPX estimates that for the fiscal year ending March 2025, total dividends in the Japanese market are expected to reach a record high of JPY 18 trillion.
In the search for reliable income, a dividend strategy should not only focus on stocks with high dividend yield but also address the sustainability of dividend yield. Especially for market participants preparing for retirement, a steady income stream may help to maintain a comfortable quality of life. A pure high yield focus may be vulnerable to dividend cuts from companies that don’t have solid financial strength and discipline. In a low-rate environment like Japan, high yield may also come from rising debt.
The Dow Jones Dividend 100 Index Series takes a holistic view of a company’s ability to generate cash flow, commitment to maintain a long-term dividend policy and level of dividend yield. In the U.S., the Dow Jones U.S. Dividend 100 Index, launched in 2011, has demonstrated a live record of robust performance and sustainable high yield. It is tracked by multiple exchange-traded funds (ETFs) in various countries, including one of the most used dividend ETFs. Given this track record in the U.S. market, we expanded the framework to international markets with the launch of the Dow Jones International Dividend 100 Index in 2021. On July 22,2024, we further extended our index offerings to the Japanese market with the launch of the Dow Jones Japan Dividend 100 Index.
Index Construction
Exhibit 2 shows the construction of the Dow Jones Japan Dividend 100 Index. The index begins with S&P Japan 500 stocks that meet the liquidity requirement and have paid dividends for 10 consecutive years, which helps to identify companies committed to maintaining a stable dividend policy. Out of eligible stocks that have passed liquidity and dividend payment consistency screens, only the top 50% of eligible stocks ranked by indicated annual dividend (IAD) yield are qualified for fundamental selection.
Fundamental selection considers a company’s ability to generate free cash flow to sustain and potentially increase dividend distribution. Eligible stocks are ranked by four metrics: free cash flow-to-total debt ratio, return on equity (ROE), dividend yield and five-year dividend growth rate. The top 100 stocks with a high average rank of these four fundamental metrics become the final constituents.
The index is designed to ensure a well-diversified basket by targeting 100 constituents, applying float-market-cap weighting, and capping single-stock and GICS® sector weights. It reconstitutes semiannually in June and December.
