Equity Income Strategies with ETFs

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In a recent article fellow blogger and portfolio manager, Roger Nusbaum noted that “it is very difficult to build an ETF portfolio that emphasizes dividend yield.” Update: Please note that Roger said the previous statement in the context of building a portfolio with ETFs at the sector level. My article below discusses about using dividend ETFs at the market/index levels.

I came across a paper that discussed this topic in more detail.

The ETF provider iShares(UK) has published a report on using dividend yield ETFs for income. The following are some of the key takeaways from this report:

a) ETFs provide the benefits of dividend investing, combined with the usual advantages of index investing: easy diversification, low costs, transparency and market representativeness.

b) Many factors are considered when building dividend indices.For example, STOXX and Euro STOXX Select Dividend indices screen companies based on dividend per share growth and earnings per share ratios whereas DivDAX uses one-year historic yields.

Methodologies followed by various dividend Indices:

Click to Enlarge

Dividend-ETf-Methodologies

c) iShares offers country-specific and regional dividend ETFs to track the following indices:

Current-Yield-of-Dividend-Indices

d) “There are two key differences between the dividend yield of an index and the distribution yield of the ETF that is tracking that index.

1. The historical fund distribution yield is based on the last 12 months of fund distributions and therefore is NOT EQUAL to the future/expected fund distribution yield

2. The index dividend yield is NOT EQUAL to the fund distribution yield”

e) Dividend ETFs can be used to offset inflation, create regular inflows, enhance portfolio yield and reduce portfolio volatility

Relation-between-inflation-dividend-etf-yields

To download the Equity Income: Investment and Strategies with iShares ETFs paper, click here.

Related ETFs from iShares(US):

1. Dow Jones International Select Dividend Index Fund  (IDV)
12-Month Yield: 3.85%

2. Dow Jones Select Dividend Index Fund  (DVY)
12-Month Yield: 3.57%

3.S&P U.S. Preferred Stock Index Fund (PFF)
12-Month Yield: 7.41%

Top Auto Companies in China and India

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The auto market in the emerging countries of China and India is growing rapidly. For example, in March this year GM sold more cars in China than in the U.S. Many of the major car makers of the world are investing heavily in these countries in order to gain market share.

Imitating the U.S.  model, China and India are promoting the growth of the automobile industry. The Financial Times recently wrote:

“China’s car-centred model of development has been a mainstay of economic growth in recent years…the spin-off benefits from burgeoning car sales have been enormous. Each car requires several thousand parts, hundreds – if not thousands – of suppliers, roads, car parks, driving schools, petrol stations and other service industries.”

While auto companies are great for economic development, they are not the best when it comes to making profits. This is especially true for the big three US automakers. However the closely-related oil industry is the most profitable in the world. In 2009, seven of the  top ten in the Global 500 rankings were oil companies. The Japanese auotmaker Toyota was ranked at number 10. China’s very own oil major China Petroleum & Chemical Corporation(SNP) was ranked ninth in the list.

An article titled Alan Mulally’s Asian Sales Call in Bloomberg BusinessWeek noted “according to market researcher J.D. Power & Associates (MHP), a third of the world’s auto sales will come from the region spanning China, India, Northeast Asia, Southeast Asia, Australia, and New Zealand.”

The Top Car Companies in China and India based on Market Share:

China-India-Car-Market-Share

Source: Bloomberg BusinessWeek

It is interesting to see that German auotmaker Volkawagen(OTC: VLKAY)holds the largest market share in China followed by GM(GM) and Toyota(TM). Ford takes the 11th spot together with domestic car companies Geely and Faw. Compared to China, Indo-Japanese joint venture company company Maruti Suzuki holds the largest market share. Ford(F) holds the eighth position.

Knowledge is Power: Small Caps, Africa, British Banks Edition

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Banking Industry Consolidation in Puerto Rico

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The FDIC shutdown three banks in Puerto Rico(PR) yesterday which were on the verge of failure. The closed banks cost over $5B to the FDIC’s Deposit Insurance Fund (DIF). The three closed banks are:

1. W Holding Co. Inc.’s Westernbank (WHI)

2. R&G Financial Corp.’s R-G Premier Bank(OTC: RGFC)

3. EuroBancshares Inc.’s EuroBank

Top-Puerto-banks-by-Deposits

Source: WSJ

Oriental Bank and Trust of PR assumed all of the deposits of Eurobank. Scotiabank de Puerto Rico, a subsidiary of Bank of Novo Scotia(BNS), one of Canada’s largest banks assumed all of the deposits of R-G Premier Bank. PR bank Banco Popular de Puerto Rico(BPOP) took over the deposits of Westernbank Puerto Rico. Hence the market share of deposits of the three acquirers would rise from the fugures shown in the graph above.

From a Journal article:

“Not since the savings-and-loan crisis has the FDIC faced such a steep challenge in a local banking market. In one day in 1991, the FDIC shuttered seven New Hampshire banks that held 25% of bank assets in the state.

Washington Mutual Bank, the largest bank failure in America, held 11% of deposits in its home state of Washington before it collapsed in 2008, the largest bank failure in U.S. history.

The three Puerto Rican banks put up for sale by U.S. regulators have one-fourth of the island’s bank assets and more than one-fourth of its deposits.”

Puerto Rico’s economy has been struggling for many years now when the manufacturing industry left due to the phasing out of tax incentives. The current unemployment rate is over 15% and the household income is worse than that of Mississippi, the poorest state in the union. The government deficit soared 30% of annual budget in 2009. So many structural changes have to be made before the economy can recover in the island nation. However sale of the above three banks puts the banking industry, the lifeblood of the country’s eocnomy, in a better positon.

Top 100 Most Valuable Global Brands 2010

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Millward Brown Optimor has published the Top 100 Global Brands for 2010. Google tops the ranking this year. The Top 10 global brands are:

  1. Google (GOOG)
  2. IBM (IBM)
  3. Apple (APPL)
  4. Microsoft (MSFT)
  5. Coca Cola (KO)
  6. McDonald’s (MCD)
  7. Marlbaro (MO)
  8. China Mobile (CHL)
  9. GE (GE)
  10. Vodafone (VOD)

In the financial sector, some of the top brands included in this list are HSBC (HBC), Banco Santander (STD),  BBVA (BBVA), Citi (C), American Express (AXP), US Bank (USB), Chase (JPM), Wells Fargo (WFC), RBC (RY), TD (TD), etc.

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Graphics – Top 100 Global Brands 2010

Top-50-Brands-Global-2010

Top-50-Brands-Global-2010-2