Low Volatility High Dividend Strategy - Sustainable Dividend Criteria:
- Companies with the highest yields are screened first, followed by applying sustainability filters to ensure the dividends are sustainable.
- The strategy focuses on selecting companies that have high and sustainable dividends supported by their earnings power.
- Payout ratios based on bottom-line earnings are analyzed to determine if companies can maintain their dividend payouts.
- The portfolio eliminates stocks with payout ratios over one as a conservative measure to ensure sustainability.
Utility Sector Dynamics:
- Utilities face challenges when interest rates rise as they compete with bonds for income-seeking investors.
- Some utilities have experienced increased demand due to industries reliant on energy supply from utility companies.
- Regulatory changes and investor preferences impact utilities' ability to sustain dividends amidst changing capital costs and debt levels.
Dividends vs. Share Buybacks:
- Dividends and share buybacks are economically equivalent from an end investor's point of view but differ in psychological impact and signaling mechanisms.
- Corporations prioritize maintaining dividends over cutting them due to historical practices, stability signaling, and meeting income-dependent investor needs.
- Investors prefer steady dividend payments for consistency rather than creating their own "dividends" through selling shares.
Impact of Concentration in Cap-weighted Indices:
- Cap-weighted indices have become highly concentrated recently, with the top 10 companies accounting for over 35% of total weight.
- Strategies like LVHD provide diversification opportunities for investors lacking diversification due to market concentration in traditional active mutual funds or index funds.