This whitepaper details the power of investing in the future dividend growth leaders, their potential to outperform the market, and how investors can take advantage Future dividend growth leaders Accessing the future of dividend growth Ticker: LEAD
The future of dividend growth s have been on the rise since the end of the financial crisis, growing dividends has been a very important theme throughout the recovery. As bond yields plummeted and stayed near historic lows, there has certainly been a dividend renaissance across the investment community. Yet, the power of dividend investing is not a recent phenomenon by any means. s have been a significant boon to investors throughout history, accounting for 43% of the overall market return of the S&P 500 since 1930 1. s can be a powerful tool, not only for income, but as an indication of company health. Just as investors often reward companies for making positive dividend announcements, executives, managers and boards are typically very reluctant to cut dividends. This results in companies being incentivized to continue to pay similar dividends despite market downturns, a significant enough motivation to make dividends alone account for over 75% of total return in lower growth periods such as during the 1940 s and the 1970 s 2. This has helped drive positive momentum in dividend growth across market cycles. In fact, the S&P has grown its dividends in 41 of the last 44 years since 1973 3. First, when companies maintain consistent dividend payouts during downturns, investors are often rewarded with more shares when reinvesting dividends, boosting total returns significantly as the market cycles back to bullish. 83% of companies in the S&P 500 currently pay dividends a number that has steadily increased since 2008 4. While dividend investing has regained popularity in the last few years, accessing the right aspects of dividend growth is certainly more challenging than just allocating to large-cap stocks. It s not about looking in the rear-view mirror or just finding the companies with the highest yield or that have paid and grown dividends historically. The ability to pinpoint and access the future of dividend growth is more important than ever today. S&P 500 DIVIDEND PER SHARE (FROM 01/01/1973 TO 12/31/2016) $45 per Share $30 $15 $0 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 Year Past performance does not guarantee future results. Source: Standard & Poor s and Reality Shares Research 1 Ned Davis Research, Inc. from 1/1/30 12/31/16. 2 Ned Davis Research, Inc. from 1/1/30 12/31/16. 3 Standard & Poor s and Reality Shares Research 4 Standard & Poor s, December 31, 2016
Why dividend growth investing? growth investing can offer a compelling and powerful investment strategy capable of providing both capital appreciation and an income stream, a result even more important in today s interest rate environment. As displayed in the next two charts, companies that were able to grow their dividends have historically outperformed the rest of the market, with significantly less volatility. Data from 1972 to 2016 suggests that dividends have provided a naturally stabilizing element of total return as a steady income stream reduced the longer-term impact of price movements, and dividend growth has also provided a natural hedge against rising prices. HISTORICAL ANNUALIZED RETURN BY DIVIDEND CATEGORY 1/31/1972-12/31/2016 12% 10% 8% 6% 4% 2% 0% -2% 9.90% S&P Growers & Initiators 7.38% S&P Payers w/ No Change 2.39% S&P Non- Paying Stocks -0.44% S&P Cutters or Eliminators Past performance does not guarantee future results. Source: Ned Davis Research, Inc. from 1/31/72 12/31/16 and Reality Shares Advisors A deeper understanding of the mechanics of dividend growth can be helpful when investing in dividend growth. s are paid out of company earnings, making the ability to grow dividends often directly correlated to earnings and profit growth. growers can be the healthiest of these established companies, rewarding investors for company success. This may be part of the reason why dividend growers even significantly outpace payers with no dividend growth over the long term. What does this mean for today s markets? Cash on corporate balance sheets is currently at record highs while dividend payout ratios are historically low, meaning there is room for potentially significant dividend growth. Cash on corporate balance sheets is at record highs while dividend payout ratios are historically low, meaning there may be room for significant dividend growth Where this gets even more interesting is when we look at non-payers and cutters, two groups trailing the dividend growers and payers significantly since 1972. As displayed in the following chart, not only have dividend growers and initiators historically outperformed, but they have done so with an annualized standard deviation about 40% lower than cutters. The negative momentum placed on a company when announcing a dividend cut can be tremendous as it may signal a significant deficiency with the company, sending investors running. Just as uncovering companies poised for dividend growth could be highly beneficial to investors, identifying and avoiding potential dividend cutters is also a powerful investment capability. RISK-RETURN PROFILE 1/31/1972-12/31/2016 Average Annualized Total Return 12% 8% 4% 0% S&P Growers & Initiators S&P Payers w/ No Change S&P Non- Paying Stocks S&P Cutters or Eliminators -4% 16% 20% 24% 28% Standard Deviation (Annualized Risk) Past performance does not guarantee future results. Source: Ned Davis Research, Inc. from 1/31/72 12/31/16 and Reality Shares Advisors
Forward-looking dividend analysis Historical information allows us to analyze dividend growers and cutters, but how can we strategically leverage this information to look into the future? There has been a disconnect in the market between backward-looking analysis and the ability to identify future dividend growth potential. While there is certainly some consistency in companies propensity to pay dividends because they have paid dividends in the past, it does not mean they will continue to do so. Historically healthy companies might announce dividend cuts and newer dividend payers might announce dividend increases, offering opportunities for investors and managers able to look forward to predict such changes. Rear-view dividend growth investors would have largely been hurt by major industry changes affecting dividend paying companies. Bank stocks for example were battered in the financial crisis spanning 2007-2009, where most banks were forced to completely cut their dividends. Similarly, many oil and energy stocks significantly cut dividends in 2015 as oil and gas prices plummeted, effectively driving a number of energy companies out of business. More strikingly, these stocks not only cut their dividends significantly but also saw a corresponding drop in stock price. These cuts and negative performance came despite quarters and even years of consistent dividend increases. A real case of past performance not being indicative of future results. While there is certainly some consistency in companies propensity to pay dividends just because they have paid dividends in the past, it does not mean they will continue to do so. POWERED BY DIVCON Access tomorrow s dividend growth... today Reality Shares sought to develop an analytical tool utilizing a forward-looking dividend growthbased security selection. We created an entirely new corporate dividend health rating system called DIVCON. The DIVCON methodology allows Reality Shares to evaluate dividend health in the pursuit of more intelligent and predictive security selection. DIVCON forecasts and ranks a company s ability to increase or decrease their future dividends by evaluating each firm on seven quantitative factors. It seeks to deliver a more accurate picture of a company s financial health and better predict the probability of an increase or decrease in a company s dividend over the next 12 months. These factors give DIVCON a picture that is more consistent with future prospects rather than past dividend changes. The seven DIVCON factors expected dividend growth, levered free cash flows, earnings per share growth, recent dividend actions, buybacks and repurchases, Bloomberg fundamentals, and Altman
Z-scores are weighted, scored and categorized according to their importance. What this means is DIVCON is able to dynamically evaluate each company s financial ability to grow their dividend in the future based on a substantial range of fundamental factors. In short, while a company s dividend history is often a good indicator of whether a dividend may rise or fall, investors not paying attention to the many other factors potentially impacting a company s payout decisions can easily be hurt. DIVCON evaluates and assigns a rating from 1 to 5 to each stock based on its assessment of financial health relative to prospects for future dividend growth. The healthiest companies earn the highest DIVCON scores and a rating of DIVCON 5, which means they exhibit the strongest likelihood of increasing their dividends in the next 12 months. The least financially stable companies are given the lowest DIVCON scores and are rated DIVCON 1, indicating their future dividend prospects are at risk. This presents to investors an easy to understand forward-looking ranking of dividend paying stocks, much like the buy-hold-sell ratings other ratings agencies and research analysts might issue on securities. Investing in the dividend leaders A timely strategy worth considering is the Reality Shares DIVCON Leaders ETF (Ticker: LEAD). LEAD utilizes the DIVCON methodology to screen, select and invest in DIVCON 5 companies - the future dividend growth leaders. Many dividend strategies have exposure to baskets of stocks that are either barely growing or even shrinking their revenues and earnings. In comparison, earnings, revenues and dividends in the LEAD portfolio can potentially grow robustly. Blindly chasing high dividend strategies can create exposure to hidden dangers and valuations. Investors can focus on quality through LEAD for both potential capital appreciation and yield. Ticker: LEAD Investing in the dividend growth leaders A large-cap equity replacement with income Offers strong upside potential and lower downside capture vs. the S&P 500 given its highquality positions A sample of the companies the LEAD ETF invests in include: You drink their coffees and use their credit cards. These are just some of the companies LEAD invests in. Access the companies with healthy, growing dividends through LEAD, an ETF focused on the dividend growth leaders. LEAD Top 10 Holdings, as of March 31, 2017 KLA-Tencor Corp: 2.25%, Texas Instruments Inc: 2.23%, Tyson Foods Inc.: 2.22%, NVIDIA Corp: 2.22%, Visa Inc: 2.20%, Equifax Inc: 2.20%, CR Bard Inc: 2.18%, S&P Global Inc: 2.16%, Scripps Networks Interactive I: 2.11%, Dr Pepper Snapple Group In 2.11%
ACCESS THE FUTURE OF DIVIDEND GROWTH At Reality Shares, we are solely focused on dividend growth investing and offer a range of alternative ETFs that pinpoint and capitalize on investment in dividend growth and the stocks that are most likely to increase their dividends, as well as avoiding those that are most likely to cut their dividends. Our rules-based, forward-looking methodology sets us apart in the market and allows investors to access and harness the power of dividend growth investing. Our proprietary DIVCON scoring system systematically ranks companies future dividend growth prospects based on a weighted average of seven quantitative factors that are correlated to dividend growth. Ask us how to capitalize on the potential of growing dividends. Contact 855.595.0240 or visit realityshares.com for more information. Definitions S&P 500: A broad stock market index of 500 large companies based on market capitalization. You cannot invest directly in an index. S&P Growers & Initiators: Companies that raised their existing dividend or initiated a new dividend during the preceding 12 months. S&P Payers w/ No Change: Companies that did not change their dividend during the preceding 12 months. S&P Non- Paying Stocks: Companies that did not pay a dividend during the preceding 12 months. S&P Cutters or Eliminators: Companies that lowered their existing dividend or stopped paying regular dividends during the preceding 12 months. Altman Z-Score: Credit-strength test that gauges a company s likelihood of bankruptcy. This material is presented for general information purposes only, and does not constitute an offer to sell securities. This publication has been prepared and issued by Reality Shares, Inc. ( Reality Shares ). Reality Shares makes no express or implied warranties, and expressly disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. Without limiting any of the foregoing and to the extent permitted by law, in no event shall Reality Shares, nor any affiliate, nor any of their respective officers, directors, partners, or employees, have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits, lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising from any use of this publication or its contents. This publication does not constitute general or personal investment advice or take into account the individual financial circumstances or investment objectives, or financial conditions of the institutional users who receive it. Other than disclosures relating to Reality Shares, the information and material contained in this publication has been obtained from sources that Reality Shares believes to be reliable, but Reality Shares does not represent or warrant that it is accurate or complete. Investing involves risks, including possible loss of principal. Past performance does not guarantee future results. There is no assurance the stated objective(s) will be met. Not FDIC insured. See the section Principal Risks in the prospectus for important risk disclosures. Additional principal risks include Equity Risk, ETF Trading Risk, Index Performance Risk, Index Tracking Error Risk, Market Risk, Investments in Other ETFs Risk, Short-Sale Risk, and Non-Diversification Risk. Please refer to the Fund Risks for further explanation of individual risks. For LEAD, there is no guarantee or assurance the methodology used to create the Benchmark Index will result in the Fund achieving positive returns. The Fund may be more susceptible to a single adverse economic or other occurrence and may therefore be more volatile than a more diversified fund. The Benchmark Index is constructed using a rules-based methodology based on quantitative models developed by Reality Shares. These quantitative models may be incomplete, flawed or based on inaccurate assumptions and, therefore, may lead to the selection of assets for inclusion in the Benchmark Index that produce inferior investment returns or provide exposure to greater risk of loss. LEAD seeks long-term capital appreciation by tracking the performance, before fees and expenses, of the Reality Shares DIVCON Leaders Index (the Benchmark Index ). Investors should carefully consider the investment objectives, risks, charges and expenses before investing in Reality Shares ETFs. This and other information other information can be found in the Fund s prospectus, which may be obtained by calling 855-595-0240 or by downloading the file from realityshares.com. Please read the prospectus carefully before investing. Reality Shares Advisors, LLC is the Investment Advisor. ALPS Distributors, Inc. is the Distributor for the Funds. Employees of Dakota are registered representatives of GrandFund Investment Group, LLC, and provide third party distribution services for Reality Shares. ALPS Distributors, Inc. is not affiliated with Reality Shares Advisors, LLC or Dakota. LEAD is new with limited operating history. ETF shares are not individually redeemable. Investors buy and sell shares of the Fund on a secondary market. Only market makers or authorized participants may trade directly with the Fund, typically in blocks of 25,000 shares. Copyright 2017 Reality Shares, Inc. All rights reserved. RLT000700 Exp. 12/31/2017.