…and How Long Before They Are Eligible for Inclusion in Various Dividend-Focused Indexes?
Co-authored by Christopher Gannatti, Research Analyst, WisdomTree
Show Me the Money
On February 23, Apple (AAPL) held its annual shareholder meeting. Prior to the gathering, there was wide speculation that Apple would announce its first dividend payment since 1995.
Apple certainly has been firing on all cylinders recently. Its sales and profits hit record highs, and its share price has appreciated to make it the largest market-value security in the United States (as it overtook Exxon Mobil (XOM) in early 2012). This means that Apple currently receives the highest weight of any security in all U.S. market capitalization-weighted[1] indexes (such as the Russell 1000 Index, the Russell 3000 Index and the S&P 500 Index)[2].
Apple's enormous profits generate large cash flows that are currently just piling up on its balance sheet. Currently, Apple's cash hoard measures about $97 billion[3]. What could the firm do with all this cash?
Do "Tech" Firms Pay Dividends?
Typically, the information technology sector has not been associated with high levels of dividends, but that has started to change.
· Just over five years ago, there was not a single information technology company among the 10 largest dividend payers in the United States and there were only two, Microsoft (MSFT) and Intel (INTC) included among the top 20[4].
· Currently, Microsoft was ranked as the 3rd largest dividend payer[5] in the United States, while Intel was the 13th largest and IBM was the 16th largest[6].
Within the next three to five years, based on the recent trends, we believe Microsoft will be the largest dividend payer in the United States and that Cisco (CSCO) will continue to climb the ladder, becoming a member of the 20 largest dividend payers.
Since the inception of WisdomTree's Dividend Index on 6/1/2006, the peak of the dividend stream[7] occurred on the 11/30/2007 annual screening date.
· Since that time, the information technology sector has increased its contribution to the cash dividend stream from about $16.2 billion to about $27.5 billion-over a 70% cumulative increase-while the aggregate dividend stream declined cumulatively by 1.7%. Dividends from the other nine sectors declined by 5.9%.
· The cumulative growth in dividends from the Information Technology sector over the last four years was more than double the cumulative growth rate of any other sector.
· It should be noted that the financial sector dividends declined considerably over this period (more than 50% cumulatively). Dividends from the non-financial sectors were up 23.6%. (Sources: WisdomTree, Bloomberg)
Another Possible Use of Cash-Share Buybacks[8]
Any analysis of the information technology sector would be incomplete without also considering share buybacks in addition to dividend payments. Within this sector, while $25 billion in dividends were paid over the 12-months prior to 12/31/2011, there were over $99 billion in stock buybacks[9]. In general, there were 67% more aggregate buybacks than indicated dividends for equities in the United States, thereby showing that for information technology firms, buybacks are the vastly preferred method of returning cash to shareholders.
Potential Dividend-Focused Index[10] Exposure to Apple and Google
Investing is largely about tradeoffs, so while a focus on dividends typically means giving up a measure of the broadness of exposure that a traditional market cap-weighted index might provide, an important question could regard how much this broad exposure needs to be sacrificed to accomplish this focus. Figure 1 provides a summary of the eligibility requirements of three of the most widely tracked U.S. dividend-focused indexes, as well as the WisdomTree Dividend Index and the WisdomTree LargeCap Dividend Index. Figure 1 also shows whether or not the top five dividend-paying information technology firms[11] are included, eligible, or excluded from the indexes. The years indicate when the specified constituents could potentially become eligible for inclusion, given the fact that they meet the appropriate requirements.
Figure 1: A Look at Five Dividend-Focused U.S. Equity Indexes
click to enlarge
Do Dividend-Focused Indexes Provide Exposures to the Largest Generators of Cash Dividends?
Another way in which to potentially evaluate a dividend-focused index might be to see whether it provides exposure to the largest generators of cash dividends. The WisdomTree Dividend Index is weighted by the indicated cash dividend stream for each of its constituent firms. As of the 11/30/2011 screening date, this stream measured over $280 billion and encompassed over 1,300 firms. For simplification, a firm's indicated cash dividend is arrived at by multiplying its indicated dividends per share over the coming year by its amount of shares outstanding.
Figure 2: 20 Largest Generators of Cash Dividends in the WisdomTree Dividend Index 
Of the twenty largest generators of cash dividends, not one of the three dividend-focused indexes shown includes even half as constituents. Six companies are actually excluded from all three. We think this, combined with Figure 1, illustrates an essential point-any inclusion policy has a double-edged nature. Ostensibly, requirements such as 5, 10, or 25 years of consistent dividend growth for inclusion in these indexes sounds like an attractive attribute, but a potential side effect of these longer-term dividend growth screens may make some of the firms with the highest prospects for dividend growth ineligible for inclusion for a number of years.
According to WisdomTree's Dividend Index, since the peak indicated dividend stream was observed on 11/30/2007, the information technology sector has shown the most cumulative growth in its indicated dividends of all of the industry sectors. Ironically, of the three information technology firms shown in the top twenty, two are excluded from all 3 dividend-focused indexes and one, IBM, is included in only one of them. As the landscape of dividend-paying sectors evolves, we think it is important to have a dividend-focused index methodology that can adapt to and encompass these changes.
To read our full analysis relating to AAPL and GOOG potentially initiating dividends, and implications for dividend-focused indexes, please click here.
Unless otherwise stated, data source is WisdomTree.
Index Definitions:
WisdomTree LargeCap Dividend Index: Fundamentally-weighted index that measures the performance of the large-capitalization segment of the U.S. dividend-paying market, dividend-weighted annually.
WisdomTree Dividend Index: Fundamentally-weighted index that measures the performance of the broad U.S. dividend-paying market, dividend-weighted annually.
WisdomTree Earnings Index: Fundamentally-weighted index that measures the performance of earnings-generating companies within the broad U.S. stock market.
S&P 500 Index: Market capitalization-weighted index of 500 stocks selected by the Standard & Poor's Index Committee designed to represent the performance of the leading industries in the United States economy.
Russell 1000 Index: A measure of the 1,000 largest companies in the Russell 3000 Index.
Russell 3000 Index: Measures the performance of the 3,000 largest U.S. companies based on total market capitalization.
Mergent Dividend Achiever Select Index: Designed to track the performance of dividend paying companies in the U.S. that have increased their annual dividend payments for the last 10 or more consecutive years.
S&P High Yield Dividend Aristocrats Index: Designed to track the performance of dividend paying companies in the U.S. that have increased their annual dividend payments for the last 25 or more consecutive years.
Dow Jones U.S. Select Dividend Index: Measures the performance of 100 U.S. dividend-paying companies.
WisdomTree Funds are distributed by ALPS Distributors, Inc.
Jeremy Schwartz and Christopher Gannatti are registered representatives of ALPS Distributors, Inc.
WIS003912 2/2013
[1] Market capitalization-weighted: Market cap = share price x number of shares outstanding. To weight by market cap, add all of the individual constituent market caps for each constituent. The proportional contribution of each to the total index market cap is the subsequent market cap-weight.
[2] Source: Bloomberg.
[3] Source: Apple Inc. Form 10-Q
[4] According to WisdomTree Dividend Index annual screening date on 11/30/06
[5] "Payer" in this context indicates the rank of the contribution to the dividend stream of the WisdomTree Dividend Index.
[6] According to WisdomTree Dividend Index annual screening date on 11/30/11
[7] Dividend stream: Dividends per share multiplied by shares outstanding for each constituent in the WisdomTree Dividend Index. The totals from each constituent are summed to form the dividend stream.
[8] Share buybacks: Companies use their cash to buy their own shares, which is typically supportive of share prices.
[9] Date calculated from the WisdomTree Earnings Index. This index is used to encompass share buybacks for firms that do not pay regular dividends, and would therefore not be included in the WisdomTree Dividend Index.
[10] Equity indexes that measure the performance specifically of dividend-paying firms and exclude non-dividend payers
[11] "Top 5" refers to Top 5 information technology firms in the U.S. ranked by market cap.
