The desire for yield and equity participation has led to a substantial increase in demand for passively managed dividend strategies over the past decade. Common strategies include dividend indices that tend to have large sector weights versus their underlying benchmark—but few, if any, are designed to be sector neutral. With this in mind, S&P DJI launched the S&P Sector-Neutral High Yield Dividend Aristocrats (HYDA) in September 2022. This index attempts to strike a balance between dividend growth and higher relative yield, while seeking to mirror the sector weights of the S&P Composite 1500®. In this paper, we review the index’s historical performance characteristics and the following aspects from the index methodology.
- Incorporating dividend growth: To be eligible for selection, constituents of the S&P Sector-Neutral HYDA must have maintained or increased total dividend per share amounts every year for at least seven consecutive years. Companies that can do this may be higher quality and exhibit features such as financial discipline or a robust business model that can weather difficult economic environments. The superior quality metrics versus the benchmark support this notion.
- A focus on yield: The index selects companies whose indicated annual dividend (IAD) yield is greater than the sector median IAD yield. This feature of the methodology enhances the overall dividend yield versus the benchmark. The average dividend yield of the S&P Sector-Neutral HYDA since 2005 is 3.02% versus 1.86% for the S&P Composite 1500. A focus on high dividend yield may also explain the value exposure of the index versus the benchmark.
- Sector neutrality: Sector neutrality in the dividend space is a key differentiator, as most dividend strategies tend to have large sector biases and underweight secular growth sectors like Information Technology, Communication Services and Health Care. Sector neutrality is achieved by adjusting the sector weights to mirror the sector weights of the S&P Composite 1500. This approach ensures the index is diversified across sectors and helps reduce the overall tracking error versus the benchmark.
