
Kathleen Dobyns
If they are reliable payers, high-dividend stocks can help investors in two ways: they boost the income from an equity portfolio while offering potential capital appreciation.
- Smart dividend stock selection avoids yield traps by using forecast dividends and excluding high-risk stocks with negative returns.
- The FTSE Global Equity High Income index provides almost double the dividend yield compared to traditional indices while maintaining diversification and stability.
- High-dividend stocks tend be less volatile, with the FTSE Global Equity High Income index showing lower historic volatility than the FTSE All-World index.
Building a high-income equity portfolio requires sophistication
In today's uncertain economic landscape, financial advisors face increasing pressure to deliver portfolios that offer both growth potential and a consistent stream of income. Amid market volatility, inflation pressures, concentration risks, and shifting client demographics, dividend-yielding stocks offer advisors a powerful tool to help clients achieve goals like stable retirement income, inflation protection, and diversified portfolio construction.
Stocks with higher dividend yields often represent mature businesses with sustainable earnings and disciplined management—precisely the type of investments that can provide an anchor of stability in volatile market conditions. However, advisors who simply chase the highest dividend yields risk exposing their clients to capital losses and income disruption. These abnormally high yields (often called "yield traps") can be a precursor of dividend cuts: Traders usually anticipate such cuts by marking down share prices, and dividend yields are calculated using backward-looking data.
A more strategic high-income equity solution captures the benefits of dividend stocks, while avoiding the pitfalls of overly simplistic approaches. To meet growing investor interest in these smarter strategies, FTSE Russell launched the FTSE Global Equity High Income index series in May 2024. The index series uses a simple, capitalisation-weighted methodology to reflect the performance of global stocks with relatively high tax-adjusted dividend yields, while also addressing concerns about possible yield traps.
Seven construction steps
High-dividend indices vary in the complexity of their construction methodologies. For this index series, we’ve adopted a simple rank-and-select rule to choose constituents. The index series follows six intuitive design steps:
- Use forward-looking dividend statements. We use forecast dividends rather than trailing (historic) dividends to rank potential index constituents; although there is close alignment between the two measures and past dividends are often a reliable indicator of future payments, forecast dividends cover almost all the global equity markets and are more responsive to changes in market conditions.
Forecast dividend coverage by cumulative index constituent weights
Source: FTSE Russell, data as of September 2024. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
- Look at after-tax dividend yields. We rank potential index constituents by net-of-tax yield, recognising the fact that index users often receive dividends after a deduction for withholding tax.
- Avoid stocks with no dividends or negative returns. To reduce the risk of yield traps, we exclude stocks with zero forecast or trailing dividends and those in the bottom fifth percentile of companies with negative one-year returns. This step screens out some of the stocks most at risk of cutting dividends.
- Consider global exposure. To enable easier country or regional carve-outs of the index series, we rank stocks within each of the eight regional universes for the FTSE Global Equity Index Series (Asia Pacific ex China ex Japan, China, Japan, Developed Europe, Emerging Europe, Middle East & Africa, Latin America, and North America).
- Stick to the top 50% of dividend payers in each region. To ensure relatively low concentration risk, maintain diversification, and aid investability, we select the top 50% of securities by dividend yield within each regional universe and weight them by market capitalisation.
- Perform regular maintenance. To constrain turnover while ensuring regular index maintenance, we incorporate buffer rules and rebalance the index annually, with the quarterly removal of securities with zero forecast or trailing dividends.
A near-doubling of the index dividend yield
Applying these construction steps to the FTSE All-World index (via a back-test) resulted in a consistent near doubling of the index’s dividend yield between September 2002 and March 2025, highlighting the selection criteria’s potential value for income-seeking investors.
FTSE All-World and FTSE All-World Equity High Income index dividend yields (%)
Source: FTSE Russell, data from 31/12/99-31/3/25 (30/9/02-31/3/25 for the FTSE All-World Equity High Income index). All performance presented for the FTSE All-World Equity High Income index prior to the index inception date is back-tested performance. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
Return and risk statistics
The total returns of the FTSE All-World Equity High Income and the FTSE All-World indices were broadly similar for most of the 23-year period, with the FTSE All-World Equity High Income index returning 8.91% per annum between September 2022 and March 2025 and the FTSE All-World index returning 9.80% per annum over the period.
In fact, the two indices’ total return ratio stayed close to 100 between 2002 and 2017, after which the outperformance of select low-dividend or zero-dividend stocks, particularly in the US equity market’s tech sector, helped the FTSE All-World index to pull ahead. The gap narrowed in 2024 as certain major tech companies began paying dividends.
Notably, the FTSE All-World Equity High Income index showed lower annualised volatility than the FTSE All-World index, reinforcing the idea that higher-dividend stocks are often stable businesses with strong cash flows that tend to be somewhat less risky than the broader market.
Total return comparison: FTSE All-World Equity High Income index/FTSE All-World index
Source: FTSE Russell, data from 30/9/2002-31/3/2025, 30/9/2002=100. All performance presented for the FTSE All-World Equity High Income index prior to the index inception date is back-tested performance. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
Total return p.a. (2002-2024) | Standard deviation p.a. (2002-2024) | |
---|---|---|
FTSE All-World Index | 9.80% | 15.31% |
FTSE All-World Equity High Income Index | 8.91% | 14.65% |
Source: FTSE Russell, data from 30/9/2002-31/3/2025, 30/9/2002=100. All performance presented for the FTSE All-World Equity High Income index prior to the index inception date is back-tested performance. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
Smarter dividend strategies
Dividend-focused strategies offer a compelling way to balance growth, income, and risk management. With a sophisticated yet intuitive approach, the FTSE Global Equity High Income index series does the heavy lifting–enabling wealth managers to help clients tap into sustainable income streams without falling into common yield traps.
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