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Blog Posts — March 8, 2021

Dividend Yield strategies rebound but European banks are not part of the picture

by Diana R. Baechle, PhD

Dividend Yield strategies are starting to stage a comeback, no thanks to European banks. After banks stopped paying dividends and exited the STOXX Europe Select Dividend 30 index, the index saw large changes in its profile, with Real Estate contributing the largest proportion of dividend yield to the index, followed by Insurance. The tracking error of the Select Dividend index (vs. the European market, as represented by the STOXX Europe 600 index) skyrocketed last year, and although it has fallen somewhat in recent months, it remains at levels not seen in a decade.

Insurance and Real Estate dividend yield contributions most prominent, as Banks are dropped

When banks halted dividend payments last year, most were eliminated through a Fast Exit[1] rule from the STOXX Europe Select Dividend 30 (Select Dividend for short) indexat the June 2020 rebalance. The weight of banks in the index fell from 27% in April to 3% in July, and by October there were no banks in the index.

Insurance has remained dominant, with a relatively constant weight in the index above 25% since April 2020. Real Estate gained weight in the index, more than doubling from April 2020 to July 2020 (going from 4% to 9%) and staying above 13% in 2021.

Source: Qontigo

We used the exposure to the Dividend Yield style factor in Axioma’s Developed Europe fundamental medium-horizon risk model as a proxy for the dividend paid by a stock. Exposure to the factor is a z-score and reflects how many standard deviations a given stock’s dividend yield is away from the cap-weighted average dividend yield in the Developed Europe model universe.

A positive exposure to the Dividend Yield factor indicates that an asset paid a dividend higher than the average dividend across all assets in the Developed Europe model universe. A zero exposure to the factor means that an asset’s payment was average, and a negative level means that the asset paid less than the average yield.

A Supersector’s Dividend Yield factor exposure was calculated as the weighted average of the exposure to the Dividend Yield style factor of all assets in the Supersector, divided by the Supersector’s weight in the Select Dividend index.

Banks’ exposure to the Dividend Yield factor turned negative in April 2020, indicating that Banks’ dividend yield dropped below the average yield in Europe. Insurance’s exposure to the style factor halved after April 2020, but Real Estate’s exposure remained high, becoming three times higher than that of Insurance by March 2021.

The following chart shows the evolution of Dividend Yield factor exposures for Banks, Insurance and Real Estate between 2019 and 2021.[2]

Source: Qontigo

Each Supersector’s dividend yield contribution to the Select Dividend index depends on both its exposure to the Dividend Yield factor and the Supersector’s weight in the index. The chart below shows Banks, Insurance and Real Estate’s dividend yield contributions.

Banks’ contribution was by far the highest among the three Supersectors in April 2020, before disappearing in subsequent months. Insurance’s contribution is now half of what it was in April 2020, and more in line with levels seen in 2019. Real Estate’s contribution has been steadily increasing, and it has been higher than that of Insurance since July of last year.

Source: Qontigo

Profile changes of STOXX Europe Select Dividend 30 index (2019-2021)

Despite being the largest supersector in the Select Dividend index, Insurance was the second-largest dividend yield contributor to the index between April 2019 and April 2020. Banks was the main contributor, although it was the second largest Supersector in the index during this period.

Real Estate saw large swings in its weight, which declined from April 2019 to April 2020 but rose again—far above previous levels—subsequently. Since July 2020, Real Estate’s dividend yield contribution has been the highest in the index, while that of Insurance held second place, although Insurance remained the largest Supersector.

Other Supersectors, such as Utilities, Telecommunications, Energy and Chemicals, also saw their dividend yield contributions to the index rise in recent months.

Source: Qontigo

The comeback of Dividend Yield strategies in 2021

After suffering significant losses in the beginning of last year, Dividend Yield investment strategies rose significantly since November, as vaccine news boosted confidence in most markets and investors expected companies to be able to pay dividends once again, or at least the period of dividend elimination was over.

Even with the steep gains in the fourth quarter, both STOXX Europe Select Dividend 30 and STOXX Europe 600[3] posted losses for 2020. The Select Dividend index’s loss was much larger than that of the European benchmark last year.

In contrast, the Select Dividend index has outpaced the STOXX Europe 600 index so far in 2021. Both indices declined recently, but they remained up year-to-date.

Source: Qontigo
Source: Qontigo

Active risk remains high for Dividend Yield strategies

For almost a decade, the total predicted risk of the STOXX Europe Select Dividend 30 index has closely tracked that of the STOXX Europe 600—until March of last year. It was surprising to see the risk of a 30-stock index so similar to that of a 600-stock index for such a long time, and at times even lower.

The market downturn pushed the risk of both indices to record-highs in March of 2020, and while volatility came down for both, as the stock market recovered, they remained well above pre-pandemic levels. Moreover, the Select Dividend index’s risk is now significantly higher than that of STOXX Europe 600, reflecting both the smaller number of names in the Select Dividend index as well as the increased risk of the Dividend Yield factor.

Active risk of the Select Dividend index more than tripled in the aftermath of the market rout in early 2020, after remaining quite steady for many years. It has fallen from the June 2020 peaks, but remains far higher than what we’ve seen in the past 10 years. For more insights on the effect of divided yield cuts on the tracking error of High-Dividend funds, see our blog Stressed-Out Dividend Yield Strategies Could Leave Some Wiggle Room in Your Risk Budget.

Source: Qontigo


The profile of the STOXX Europe Select Dividend 30 index changed dramatically between 2019 and 2021. Banks, which had represented close to a third of the Dividend index in April 2020, were eliminated from the index by June 2020, after dividend payments were halted. Real Estate and Insurance became the largest dividend yield contributors to the Select Dividend index.

Dividend Yield strategies have seen a comeback since November, with the Select Dividend index outperforming the STOXX Europe 600 index in 2021. Active risk for the Select Dividend index came down from the 2020 peaks, but remains far higher than historical levels. Pursuing a high yield strategy today may pay off in the future, but it comes with a higher degree of risk.

For more insights and research from the Applied Research team, please click here.

[1] The Fast Exit rule states that if a company cancels one of its dividends, that company will be deleted from the STOXX Europe Select Dividend 30 index. For more information about the Fast Exit rule, see the index methodology here:

[2] Many thanks to our colleague Walter Wang for providing the Supersector weights and Dividend Yield factor exposure data for this analysis.

[3] The stocks in the STOXX Europe Select Dividend 30 index are selected from STOXX Europe 600.