Capitalizing on U.S. High Dividend Investing with AGF Enhanced U.S. Equity Income Fund
Dividends are a crucial component of equity performance, as such, investors will benefit from having exposure to companies that consistently pay and grow their dividends over time.
Though broadly understood, the fundamental importance of dividends when examining the total return performance of equities remains somewhat understated. This article will focus on dividend investing, highlighting their crucial nature to total return performance and how the AGF Enhanced U.S. Equity Income Fund (Ticker: AENU) provides investors with a pure-play dividend focus.
Looking through history
In examining the performance of the S&P 500 Price Return Index and S&P 500 Total Return Index over the past eight decades, we can demonstrate the seminal importance of dividends across differing periods. As observed in the following chart, while the contributing impact of dividends does vary in each decade, from 1940 to 2022, approximately 40% of the annualized total return of the S&P 500 was derived from the payment and reinvestment of dividends, with capital appreciation contributing the rest.
Dividend Policy & Equity Performance
The importance of dividends in regard to total equity return performance has led to research examining the dividend policy actions taken by companies. In the US, Ned Davis Research (NDR), a global provider of independent investment research, conducted a research study to learn more about the relative performance of companies according to their dividend policies. In NDR’s study, they divided companies into two groups based on whether or not they paid a dividend during the previous 12 months; they named these two groups “dividend payers” and “dividend non-payers.”
The “dividend payers” were then divided further into three groups based on their dividend-payout behavior during the previous 12 months. Companies that kept their dividends per share at the same level were classified as “no change.” Companies that raised their dividends were classified as “dividend growers and initiators.” Companies that lowered or eliminated their dividends were classified as “dividend cutters or eliminators.” Companies that were classified as either “dividend growers and initiators” or “dividend cutters and eliminators” remained in these same categories for the next 12 months, or until there was another dividend change.
For each of the five categories (dividend payers, dividend non-payers, dividend growers and initiators, dividend non-payers, and no change in dividend policy) a total-return geometric average was calculated; monthly rebalancing was also employed.
As observed from the following chart, shares of companies that have initiated, and steadily grown dividends have outperformed companies with different dividend policies, including paying but not growing their dividend, cutting, or eliminating the dividend, or not paying a dividend at all. This long-term outperformance is attributable to the typical profile of a dividend grower: a stable business model, a strong balance sheet, a history of capital discipline, and management teams committed to returning value to shareholders. Companies exhibiting both the willingness and ability to persistently grow their dividends have delivered value over a variety of market and economic cycles and through difficult operating environments.
Investing in Dividend Growers & Initiators
For investors interested in having concentrated exposure to companies classified as ‘Dividend Growers & Initiators, the S&P 500 Dividend Aristocrats Index is a good barometer for assessing overall performance. A Dividend Aristocrat is a company in the S&P 500 Index that has paid – and increased – its base dividend every year for at least 25 years consecutively. In looking at the long run performance relative to the S&P 500 Index, the S&P 500 Dividend Aristocrats Index has clearly outperformed over the long term.
While some investors may choose to focus on companies that consistently grow their dividends over time, others may focus on companies that offer the highest level of dividend payout. The S&P 500 High Dividend Index reflects this ideology, as it provides exposure to the highest quintile of dividend-paying stocks in the S&P 500. While the absolute performance of focusing on high dividend equities is strong, the investment experience it provides over a long-time frame is very different, as observed from the chart.
For dividend focused investors, the message is clear, dividend growers and initiators have historically provided greater total return with less volatility relative to companies that either maintained or cut their dividends. Furthermore, investors should only use yield as one consideration when selecting a dividend-paying investment – as a high yield does not always mean a smooth investment performance over the long run.
AGF Enhanced U.S. Equity Income Fund (AENU)
As a prominent, multi-dimensional asset manager, AGF Investments Inc. (AGF Investments) provides investors with diverse investment solutions to help them actualize their long-term goals. For dividend focused investors within the U.S. Equities arena, the AGF Enhanced U.S. Equity Income Fund (AENU) is an actively managed solution that invests in businesses with a history of a high, consistent yield and/or demonstrated dividend growth.
The investment approach utilized by the manager will employ fundamental analysis and an in-depth evaluation of companies to determine their suitability as holdings within the portfolio. Central to this evaluation is assessing companies through the lens of quality, growth, and valuation investment factors. By using these investment factors, the manager is intentionally creating a solution that:
- Holds companies capable of sustaining and extending their competitive advantages over time.
- Is growth oriented, with businesses demonstrating above-average earnings or revenue growth; and are expected to grow faster relative to the broader market.
- Has a margin of safety, based on a clear understanding of a company’s intrinsic value and what the market price implies about consensus expectations for that company’s value.
Simply put, AGF’s actively managed approach to dividend-focused investing seeks to create a high-quality solution capable of generating consistent income through varying business cycles by focusing on best-in-class, fairly valued companies.
The AGF Enhanced U.S. Equity Income Fund’s income focus is not limited solely to dividend investing, as an additive measure, the fund will also employ a dynamic option overlay strategy to generate additional income. In speaking with Jeff Kay, Vice-President and Portfolio Manager of AGF Investments about the fund’s investment approach, the firm believes, ”a diversified portfolio of dividend-paying U.S. equity securities combined with an actively managed option writing strategy may provide an attractive risk-adjusted return profile and consistent income.”
For investors interested in dividend focused investing, the AGF Enhanced U.S. Equity Income Fund provides exposure to a diverse grouping of U.S. companies capable of making regular cash dividend payments and utilizes a covered call strategy to augment the fund’s income generation capabilities.
Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.
