One of the funds that I am invested in is the Vanguard High Dividend Yield ETF (VYM). Another one is the Vanguard International High Dividend Yield ETF (VYMI). They both track the FTSE High Dividend Yield Index, with VYM holding companies that are based in the USA or trade on American stock exchanges, and VYMI holding stocks from the rest of the world. The FTSE High Dividend Yield Index is a subset of the FTSE All-World Index (you can find the methodology at this link). All of the dividend indexes are sub-indexes of general global or national stock indexes.
They have a lot of rules about what happens when there is a stock split, or a merger, and how often the stocks are rebalanced. I am not going to go into too much detail about any of those rules since they are generally the same, and not too relevant.
The FTSE All-World Index has the usual requirements about longevity, market cap and liquidity as other world indexes. It excludes MLPs, LLPs and LLCs. For developed markets, at least 5% of the voting shares have to be owned by “unrestricted shareholders”, which I think means entities not associated with the company. The companies have to have a free float of at least 5%. The company, exchange and country should have few restrictions on foreign ownership. The liquidity threshold is that at least 0.04% of a company’s shares should turn over every month.
The FTSE High Dividend Yield Index excludes REITs and any companies that are not forecast to pay any dividends over the next 12 months, and ranks what is left by yield. The stocks in the index are weighted by “investable market capitalisation, i.e. after taking account of free float and foreign ownership restrictions”. It calculates the dividend yield using “the most recent I/B/E/S forecast DPS value”. (Forecast by whom? I am not too clear.) I think I/B/E/S refers to Institutional Brokers’ Estimate System (IBES) It is made by Thompson Reuters.
In section 5 of the methodology document, it says: “The FTSE All-World High Dividend Yield Index aims to contain the highest yielding stocks accounting for 50% of the investable market capitalisation of the Eligible Securities as defined in Section 4.” I guess this means they take the stocks with the highest yield and go down the list until they get enough stocks to make up 50% of the total market capitalization.
Like the pages about IBES linked above say, it uses analysts’ estimates. Why should I base my retirement on analysts’ estimates? Why not just use past data like other indexes? I know that past performance is not a guarantee of future results, but neither is someone’s guess. Besides, we are dealing with publicly traded corporations. Why not just use the publicly available data?
This is NOT a dividend growth index. This is just looking at stocks based on how big analysts think the yields will be. So it could have a lot of weak companies that are struggling to maintain their dividends.
If a company increases its dividend for a decade, it is probably in pretty good shape. Why rely on someone’s guess on companies that do not increase dividends?
The use of estimates over historical data is one reason that I am thinking about selling these funds. Another is that they are not really dividend growth funds. I admit, I got them to juice performance a bit, but I am starting to reconsider that. Another thing that bothers me is that they just take all stocks that have a yield. As any good investor knows, a yield can be too high, even a sign of trouble. Some indexes exclude stocks whose yield puts them in the top decile in terms of yield. Granted, if a fund has a few hundred stocks, then any fallout from bad stocks would be minimized.
Nevertheless, since these funds are not true DGI funds and use analysts’ estimates as opposed to historical data, I am considering replacing them. Honestly: Did Vanguard get all the crappy indexes? Is that why they are so cheap?
FTSE refers to the FTSE Group.
Big Jim has decided to be more focused with his ETF investments.
Byzantine icon of Mary Magdalene, assumed allowed under Fair Use.
