When it comes to consistently rising dividends, execution and excellence are paramount. Though a company might borrow funds to pay for a special one-time dividend, regular dividend payments require a steady stream of free cash flow. Increasing those dividends over time, furthermore, demands growth in free cash flow plus management’s long-term commitment to increasing dividends.
Companies qualifying for the NASDAQ Dividend Achievers indexes have demonstrated their consistent commitment to generating value for shareholders. The indexes started in 1979, when Moody’s Investor Service created a proprietary model designed to identify financially strong dividend-paying companies. Mergent, Inc., acquired the model in 1998, and the indexes became known as the Mergent Dividend Achievers Indexes.
NASDAQ OMX acquired the Dividend Achievers brand from Mergent in late 2012 and added several screening rules to make the indexes more transparent for investors. The Dividend Achievers are now part of the NASDAQ Dividend and Income Index group, but the underlying approach to selecting index components remains the same, according to John L. Jacobs, executive vice president with NASDAQ OMX Group in Rockville, Md.
“We didn’t change the flavor [or] the overall approach that Mergent had to Dividend Achievers, because we think that’s the secret sauce,” says Jacobs. “But what we did do is standardize them to be consistent with NASDAQ’s philosophy of objective, transparent rule-based indexes that we administer on a very consistent basis. So, no surprises.”
Jacobs provides several examples of this standardization. If a company announces it will be involved in a merger, it won’t be included— which avoids its post-merger removal. Bankrupt companies are not included.
NASDAQ also has detailed its policies on when it will rebalance an index and how it will handle stock issuances. For example, if a company declares a large stock split or secondary offering that will change more than 10% of its total shares outstanding, that index will be adjusted immediately. Smaller changes are deferred to the quarterly rebalancing date.
“If it’s smaller than that—routine (cases) where a company changed their total shares outstanding because of an employee stock option exercise or this, that and the other—then we do those on a quarterly basis to coincide with quarterly rebalancing,” says Jacobs.
There are multiple NASDAQ Dividend Achiever indexes, and the index components can overlap to allow for more focused tracking. The Dividend Achievers 50 index, for instance, is comprised of the top 50 securities ranked by yield in the U.S. Broad Dividend Achievers index. (The table to the right shows the currently available indexes and the number of companies in each.)
The indexes are diversified across industries. The composition of the U.S. Broad Dividend Achievers index includes basic materials (3.56% of the index value); consumer goods (21.58%); consumer services (13.36%); financials (5.39%); health care (10.11%); industrials (13.64%); oil and gas (17.20%); technology (5.53%); telecommunications (5.22%) and utilities (4.41%).
Achieving Index Status
The Dividend Achievers is an exclusive club. To qualify, a company must meet multiple requirements, such as dividend payments, listing and liquidity. For the U.S. Broad Dividend Achievers Index, as detailed on the NASDAQ OMX website, the security types eligible include: common stocks, shares or units of beneficial interest, limited partnership interests and shares of limited liability companies.
To be eligible for initial inclusion in the index, a security must have at least 10 consecutive years of increasing annual regular dividends based on pay-date, be incorporated in the United States or certain benefit-driven countries, and have a minimum average daily cash volume of $500,000 in November and December.
NASDAQ reviews the index’s composition annually in January. If a change is required, it becomes effective after the close of trading on the last trade day of that month. Stocks can be removed during the year and replaced.
Other details worth noting:
- The index is rebalanced quarterly with changes to the shares becoming effective after the close of trading on the last trading day in March, June, September and December.
- NASDAQ calculates two versions of the index; the price return version (DAA) does not account for cash dividends; the total return version (DAATR) reinvests cash dividends on the ex-date; and both Indexes reflect extraordinary cash distributions.
The qualification requirements for the International Dividend Achievers Index are similar, but the screens are applied to and adjusted for non-U.S. securities. Eligible securities include ADRs (American depositary receipts), GDRs (global depositary receipts), limited partnership interests, ordinary shares and shares of limited liability companies.
Additional inclusion criteria include:
- Listing on the NASDAQ Stock Market (NASDAQ), the New York Stock Exchange and NYSE MKT;
- The security’s issuer must be incorporated outside of the United States;
- A minimum average daily cash volume of $500,000 in November and December (before the January listing);
- At least five consecutive years of increasing annual regular dividends based on pay-date;
- If an issuer has multiple securities, the security with the highest cash volume will be selected for possible inclusion into the Index;
- The issuer may not have entered into a definitive agreement or other arrangement which would likely result in the security no longer being index eligible;
- The issuer may not currently be in bankruptcy proceedings; and
- A GDR must be listed on the London Stock Exchange and have a U.S. listing on the OTCBB, Pink Sheets or NBB and meet the additional eligibility criteria other than listing market.
Investment managers can license the Dividend Achievers indexes for products such as mutual funds, exchange-traded funds (ETFs), unit investment trusts (UITs), structured products, separately managed accounts (SMAs) and others. As of early July 2013, Dividend Achiever products held approximately $19 billion of investor assets. (The table above lists currently available products based on these indexes.)
The Importance of Dividends
Some investors focus more on dividend-paying stocks when interest rates on fixed-income investments are low or equity markets are unusually volatile. While these are valid motivations, of course, they overlook other features that make dividend-paying stocks attractive as long-term investments in a variety of market environments. As the NASDAQ website notes:
Companies that pay regular dividends tend to be in better financial health and produce sustained earnings and revenue growth.