Income-oriented investors may be able to generate a healthy and sustainable dividend while still meeting their ESG goals, according to new insight.
We recently compared trailing twelve-month yield and 5-year returns for the Morningstar Dividend Yield Focus Index, which does not use ESG criteria, to the Morningstar US Sustainability Dividend Yield Focus Index, which screens for ESG risk as well as dividend paying capacity, utilizing forward-looking inputs from Sustainalytics and Morningstar Equity Research.
We then made a similar comparison for global yield strategies, examining yield and return for the Morningstar Global Markets Dividend Yield Focus to the Morningstar Global Markets Sustainability Dividend Yield Focus.
In both comparisons, the sustainable yield index strategy exhibited a comparable current yield with a higher 5-year annualized return than its non-sustainable yield index counterpart.
All back-tested strategies are created with the benefit of hindsight. As such, some annualized returns shown are hypothetical (prior to index inception date), do not represent actual decision-making, and may not reflect the impact material economic and market factors might have had on Morningstar’s decision-making process. Future results can differ significantly from the back-tested returns shown.
Dan Lefkovitz – Strategist, Morningstar Indexes
“Finding companies with attractive yields and low ESG risk can be challenging, as many dividend paying companies tend to cluster in old economy sectors. Yet it is possible to balance ESG objectives with equity income objectives. By incorporating fundamental research and ESG risk ratings, the Morningstar Sustainability Dividend Yield Focus Indexes uncover high-quality, financially healthy dividend payers that are attractive from an ESG perspective.”
Dan Lefkovitz shares more insights on this topic in a recent paper – Sustainable dividends for sustainable investors. If you have any questions or would like to speak with Dan Lefkovitz, please reach out to Tim Benedict at tim.benedict@morningstar.com or (203) 339-1912.