As a result, just over half (51%) of IFAs believe investing for income will become more important over the next two years.
Only 2% think it will become less so.
Two-thirds (68%) of IFAs say the chances of investors being caught out by a ‘value trap’ – where a company paying an attractive dividend cuts its dividend sharply or fails to pay one – will increase.
Only 30% believe data from companies is transparent when assessing whether or not they will pay an attractive dividend.
Smart Beta
To help address the growing challenge, Source and Research Affiliates, a global smart beta and asset allocator, have launched three smart beta income ETFs.
They aim to provide exposure to the new FTSE RAFI Equity Income Indices, which target high-dividend-paying stocks that have been screened to favour sustainable income. The ETFs will offer investors a choice between US, UK, and European exposure.
Source’s research found that 21% of IFAs currently invest in smart beta strategies; and, of those that don’t, 19% expect to over the next two years.
Furthermore, 35% believe more smart beta ETFs will launch over the next three years, and over one in four (27%) believe IFAs will increasingly focus on these types of strategies to enhance dividend yields.
Chris Mellor, executive director, equity product management at Source, said: “Many investors have been struggling to generate income in the current environment, with bond yields low and with most high-yielding equity strategies being overly exposed to low quality or low growth stocks.”
Strategy
To construct the indices, Research Affiliates screens out companies in poor financial health, and then from the remaining stocks selects the top 50% in each sector based on their dividend yield.
It then weights the constituents by the product of their dividend yield and RAFI Fundamental weight, which is based on four fundamental measures of the company’s size rather than its market capitalisation.
The aim of this process is to build a portfolio of high-yielding, high quality stocks while avoiding excessive sector tilts and the biases that are inherent in market-cap-weighted indices.
Rob Arnott, chairman and chief executive of Research Affiliates, said: “Although there are a number of dividend-based indexing strategies on the market, few seek to assure that the stock is attractively priced on measures other than the dividend yield, and even fewer filter to assure that the dividend is sustainable.”
