High dividends aren’t the only investment measure for equity-income ETFs.
Today’s historically low interest rates have driven some income-searching investors to high-yield stocks, a narrowly focused strategy that can ignore potential pitfalls ranging from unsustainable dividends to lack of capital appreciation. Funds such as Pacific Global US Equity Income ETF and Pacific Global International Equity Income ETF take a different approach in the search for income. They seek attractive, supportable, and potentially growing yields from companies believed to be financially sound and primed for growth. The strategy considers yield and capital appreciation with the goal of boosting total return.
Historically, high-dividend corners of the market such as Real Estate Investment Trusts (REITs) and public-utility companies have provided investors with attractive yields. Over the past five years, the utilities sector has had an average yield of 3.4%1 and REITs 3.5%1 compared to the Russell 1000 Index dividend yield of 1.9% (as of Dec. 31, 2019)¹.
But income-producing equities shouldn’t be measured on yields alone; chasing high yields can lure investors into dividend traps that downplay other investment metrics, including the stability of the company (and therefore its distributions) and total returns.
While typically higher yielding, REITs and public utilities usually have large amounts of leverage that can hinder growth of their underlying business. By law, REITs must pay 90% of their taxable income as distributions to shareholders, and highly regulated utilities face restrictions on rate increases, constraining revenue growth. With limited ability to grow, it can be a challenge to produce extra earnings for shareholders and increased dividends.
Also, the valuations of REITs and public utilities—popular defensive securities in this low-rate environment—have risen beyond historic levels, leaving them vulnerable to corrections.
Investors can find themselves in a different kind of dividend snare if they simply search for the highest-yielding equities, regardless of sector. High yields equate to high risks. Investors may find their too-good-to-be-true dividends cut and the company’s share prices falling.
Pacific Global’s equity income ETFs look at all sectors from companies that we believe to be financially sound and have increasing revenues and earnings, which can provide a solid foundation for premium dividends (that can potentially grow along with the company), ascending share prices, and a better total return than high-dividend equities
¹Source, FactSet. Past performance does not guarantee future results. The referenced indices are shown for informational purposes only and are not meant to represent the Funds. Investors cannot directly invest in an index.