Reality Shares, a specialist provider of smart beta dividend strategies, has launched the Reality Shares DIVCON Leaders Dividend ETF (BATS: LEAD) on the BATS Exchange. The ETF is the first in a series of dividend-growth ETFs and the first to utilise the firm’s innovative DIVCON methodology.
Eric Ervin, CEO of Reality Shares.
Linked to the Reality Shares DIVCON Leaders Dividend Index, the ETF seeks to identify large-cap US companies which, according to the proprietary DIVCON rating system, have the highest probability of increasing their dividends within a year.
The stock selection process focuses on seven key indicators of company quality which historically have been positively correlated with dividend growth. These include analysts’ consensus of expected dividend levels, coverage ratios (free cash flow/dividend cash flow), EPS growth over the previous 12 months, the firm’s record of dividend changes, share repurchases, Bloomberg dividend health scores, and Altman Z-Scores (a probability measure of firm bankruptcy).
The methodology applies a weighted average of the seven indicators to generate a score for each firm between 1-100. The index thereby assigns each company a DIVCON rating between 1-5 where higher ratings indicate a greater probability of future dividend increases. The DIVCON Leaders Dividend Index selects those firms with the highest rating of five for final inclusion.
“We believe that dividends are a strong indication of companies’ economic health, but all dividend-paying companies are not created equal,” said Eric Ervin, CEO of Reality Shares. “Companies that increase their dividends have historically outperformed those with flat or declining dividends, or no dividend at all. Our DIVCON ETFs are designed to provide differentiated returns by investing only in the select group of companies whose fundamental corporate strength have earned them the highest DIVCON dividend health scores and our highest expectations for dividend growth.”
As of 31 December 2015, the index is primarily weighted towards the consumer discretionary (28.5%), industrials (28.1%), consumer staples (11.6%) and information technology (11.4%) sectors. The fund has a total expense ratio of 0.43%.
Reality Shares has announced plans to launch additional DIVCON-based ETFs in the coming weeks which will offer a range of innovative risk-mitigation features.