Index provider S&P Dow Jones Indices has teamed up with the Japan Exchange Group and the Tokyo Stock Exchange to launch the S&P/JPX Dividend Aristocrats Index. The index is designed to measure the performance of the highest dividend yielding companies within the Tokyo Stock Price Index, or TOPIX, universe that have followed a policy of increasing or maintaining stable dividends for at least 10 straight years. The index expands the hugely popular “Dividend Aristocrats” range and becomes the third index in the new S&P/JPX Smart Beta Index Series.

S&P/JPX Dividend Aristocrats Index screens stocks to include only those with stable or increasing dividend levels.

The index methodology aims to achieve a balance between high dividend yield and dividend sustainability and growth. It incorporates criteria on dividend payout ratio and maximum trailing dividend yield, to exclude companies whose future dividend payout may be considered potentially less sustainable. The index is weighted by trailing dividend yield to tilt the portfolio towards companies with higher dividend yields.

The index constituents are rebalanced once a year in July. At each rebalancing modifications are made to stock weights to ensure diversification across individual stocks and sectors. The index methodology also incorporates minimum market capitalization and liquidity criteria.

Research from S&P Dow Jones indicates that dividends, on average, account for a third of equity returns. By using the above criteria, the methodology not only ensures a stable income stream but may also capture a quality tilt, as firms generally require robust balance sheets and stable earnings growth to maintain or increase dividends over the long term.

The index will likely appeal to investors and is well suited for exchange-traded fund product development. Existing Dividend Aristocrats ETFs include the $12.8bn NYSE Arca-listed SPDR S&P Dividend ETF (SDY), linked to the S&P High Yield Dividend Aristocrats Index, and the $2.0bn SPDR S&P US Dividend Aristocrats UCITS ETF (SPYD) listed on European exchanges. Various other ETFs are also available in Europe including the SPDR S&P Global Dividend Aristocrats UCITS ETF (GLDV) and the SPDR S&P Pan Asia Dividend Aristocrats UCITS ETF (ASDV), which provide exposure to high-yielding equities from across the developed and emerging world and Asia Pacific region, respectively.

The other two indices in the S&P/JPX Smart Beta Index Series are the S&P/JPX GIVI (Global Intrinsic Value Index), where stocks are weighted according to their intrinsic worth using book values and projected five year earnings, and the S&P/JPX Risk Control Index (5%, 10% and 15%), where the risk of the underlying index is controlled using a mathematical algorithm overlay.