Benchmark Changing Process

With interest rates reaching an all-time low of 0.25% in March, they either are going to remain low or creep up in the years ahead. As the risk-free rate increases, investors are more inclined to sell high dividend stocks and buy fixed-income assets with guaranteed income streams. For this reason, we cannot keep benching our Factor-Based High Dividend Equity Strategy against the S&P/TSX TR as high dividend stocks may be affected by a long term shift of monetary policy and lag growth stocks. In this article, we are explaining the pros and cons of benchmarks that could serve as potential candidates for replacement.


1. S&P/TSX Dividend Aristocrats TR

Objective
The index is consisting of 40 stocks from the S&P Canada Broad Market Index that have followed a managed-dividends policy of increasing dividends. The index is weighted by indicated annual dividend yield. The Dividend Aristocrats constituent universe is reviewed every January.

Pros

  • The inception date of the index is 2001;
  • Well known / marketed methodology;
  • High correlation with our strategy.

Cons

  • More like a strategy than broad based;
  • Concentrated with only 40 constituents;
  • Include small caps (C$300M minimum).

2. S&P/TSX High Dividend TR

Objective

The index is consisting of 50 to 75 stocks selected from the S&P/TSX TR focusing on dividend income. The index is market-capitalization weighted, with stocks capped at 5% and each sector capped at 30%. The index rebalances quarterly on the same schedule as the S&P/TSX TR.

Pros

  • Broad based approach with many stocks;
  • More diversified with 75 constituents;
  • Market cap weighted & more liquid.
  • Highest correlation with our strategy;

Cons

  • The inception date of the index is 2006.

3. S&P/TSX Dividend TR

Objective

The index includes all stocks in the S&P/TSX TR with positive indicated annual dividend yields as of the latest rebalancing of the S&P/TSX TR. The index rebalances quarterly on the same schedule as the S&P/TSX TR and follows similar index adjustments and corporate actions.

Pros

  • Broad based approach with many stocks;
  • More diversified with many constituents;
  • Market cap weighted & more liquid.

Cons

  • The inception date of the index is 2006.
  • No ETF seems to be tracking that index;
  • Include stocks with low dividend yield;
  • Lowest correlation with our strategy.

Conclusion

After weighting the pros and cons, it is increasingly obvious that we must settle for the S&P/TSX High Dividend TR. Therefore, we are going to implement this new benchmark for our Factor-Based High Dividend Equity Strategy as of May 1st. This new benchmark is going to be used for the timeframe between 2006 and Today. However, we are going to use the S&P/TSX TR for the timeframe before 2006 to fill the void.

The Portfolio Management Team

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