Why are high-dividend stocks strong? ETF investment strategy that follows “the bird-in-hand theory”

 Written by:  Mutsumi Kagawa (Chief Global Strategist, Economic Research Institute of Rakuten Securities)

(10/06/2022)

 

1. High-dividend stocks are strong based on “the bird-in-hand theory”

Japan stocks are moving steadily despite uncertainties within the external environment, especially relative strength of “high-dividend stocks” (stocks with high dividend yields) is particularly noteworthy. Chart 1 shows the changes of the “Nikkei Average High Dividend Stock 50 Index” and the Nikkei Average. Among the stocks of the Nikkei Average, you can see that the High Dividend Stock 50 Index, which consists of stocks with high dividend yields grow stronger since December last year. An ancient Western proverb says, “A bird in the hand is worth two in the bush.” In the investment world, it is known as “The bird-in-hand theory”, which symbolizes yield-focused investment needs. It expresses the investment style of “the two birds that are hidden in the bush (in the distance) (increased earnings) are uncertain, but investments that provide a relatively high yield income in the hands (at your feet) is reliable. The Japanese proverb that says, “Today’s fifty is better than tomorrow’s one hundred” means it is better to have something that you will definitely get than many things that you do not know in the future. The high-dividend stocks are rated as investment subjects that emphasize on yields. In this article, I will focus on investment strategies that focus on TSE-listed ETFs (Exchange Traded Funds) that make concentrated diversified investment in high-dividend stocks.

 

<Chart 1> Strong performance of high-yield stocks stand out in the Japan market

(Source) Created by Economic Research Institute of Rakuten Securities, Inc. from Bloomberg (beginning of Jun 2021 – Jun 8, 2022)

 

2. Focus on the high-dividend stock 50 index-linked ETF

As shown in Chart 1, the Nikkei Average 50 Index has been outperforming the Nikkei average since December last year. It indicates that stocks with relatively high dividends (yields) to investors are gaining market valuation while we cannot avoid the “variability” and “uncertainty” that symbolize the VUCA (Volatility, Uncertainty, Complexity, Ambiguity) era, such as accelerated inflation, monetary tightening, the Ukrainian crisis and concerns about recession. Under these circumstances, the performance of the TSE-listed ETF (TSE code: 1489), which is linked to the Nikkei Average High Dividend Stock 50 Index, is strong (Chart 2). Since the ETF is traded from one unit and the transaction price is 42,000 yen (as of June 8), it is possible to acquire a portfolio of diversified investment in Japan high-dividend stocks with slightly over 40,000 yen. The year-to-date percentage change of the ETF is +16.0%, which is much higher than the Nikkei Average (-1.9%) (as of June 8). In addition, the dividend yield of the ETF (cumulative 1-year results/quarterly settlement of accounts) is approximately 4.2% annually.

 

<Chart 2> Focus on the high-dividend stock 50 index-linked ETF

(Source) Created by Economic Research Institute of Rakuten Securities, Inc. from Bloomberg (beginning of Jun 2021 – Jun 8, 2022)

 

The ETF has net management assets of approximately 36.1 billion yen and is managed by Nomura Asset Management. It should be noted that the dividends of the ETF (yield: about 4.2%) are paid up to 4 times a year (quarterly settlement) by aggregating the dividends from the stocks. Generally, Japan companies’ dividends are paid half-yearly. However, the feature of this ETF is that it pays the dividend (cash flow) to the beneficiaries quarterly by taking the difference in the fiscal year end and the dividend payment date into the consideration. With the fact that it is an index-linked fund, the expense ratio (trust fee rate) of the ETF is managed at 0.28%, including the administrative costs for the dividend payment.

 

3. Check out the main stocks of the 50 High Dividend Stock Index

Of course, it is also possible to select individual high-dividend stocks and make diversified investments instead of investing in the ETF mentioned above. Chart 3 is a list of the top 15 stocks of the high-dividend stock ETF. In addition to the relatively high dividend yield and relatively low expected PER (price-earnings ratio) and PBR (price-to-book ratio), all of the listed stocks have a positive (increasing) year-to-date percentage change. It is also possible to build a “tailor-made high-dividend stock portfolio” that follows the bird-in-hand theory by buying multiple stocks from different industries according to their financial strength. If you are trying to select the stocks, I would recommend you to check the earning forecast as thorough as possible, such as is it possible to maintain or increase dividends not only in the current term but also after the next term. If you feel the hassle and risk in selecting stocks, I think it is better to consider a lump sum investment in the ETF (1489) listed above.

 

<Chart 3>   The main stocks of high-dividend ETF have had a strong year-to-date percentage change.

(Source) Created by Economic Research Institute of Rakuten Securities, Inc. from Bloomberg (Jun 8, 2022)