FTSE targets providers with new sustainable yield index series

FTSE Group has launched a new family of benchmarks designed to measure the performance of equity securities that deliver high and sustainable yields. The FTSE Global Sustainable Yield Index Series reflect the next stage in the evolution of higher yielding indices, with an emphasis on dividend sustainability, said the index provider

Although no structured products providers have made inquiries and no exchange-traded products (ETPs) providers have yet licensed the index, Jamie Perrett, director of index research at FTSE, is confident the new series members will be deployed as underlyings for index-linked products. “FTSE launches indices to respond to investors’ needs and I’m sure in the not too distant future we will see products tracking or linked to the performance of these indices,” said Perrett.

“Requests from product providers do vary and we have seen demands from institutional investors that want to diversify into higher yielding assets, especially as other asset classes’ yields such as fixed income have become compressed.”

Dividend indices are becoming increasingly popular with interest rates still so low. “Investors are looking to diversify into high-yielding areas, such as real estate and infrastructure; however, equities are also achieving high yields in certain sectors and countries,” said Perrett. “The popularity of products on existing dividend indices saw a decline during the financial crisis, as it became increasingly apparent that many of the high dividend forecasts were not going to be paid, especially those in the financial sector.”

The new benchmarks exclude extreme yielding stocks and assess financial and operating strength. A specific focus is given to companies identified as having strong balance sheets and the ability to generate positive cashflow. Other screening criteria include the payout ratio and incidence of historic and forecast dividend cuts as historically such stocks are susceptible to falling dividends and consequently lower realised yields.

One of the areas that FTSE looked at when designing the indices was whether individual dividend forecasts are actually sustainable, said Perrett. “We also looked at the turnover and capacity issues on some of the indices currently available, including country and sector biases,” he said. “We wanted to build a more representative index that measures the performance of companies delivering high and sustainable yields. We didn’t necessarily want to include all the high yielding companies in the index but those that had a higher probability of paying dividends.”

Perrett also said that the new indices are not alternative-weighted benchmarks, as the constituents in the index are weighted by market cap. “We have seen that this reduces tracking error relative to the underlying index and also reduces turnover,” he said. “It also increases capacity, which is actually beneficial for product issuers depending on the size of the fund.”

The new index series will initially consist of 11 individual benchmarks capturing a range of different markets and regions.

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FTSE targets providers with new sustainable yield index series