Dividend Income Investing: A Free Cash Flow Perspective · 2020-06-03 · as large (S&P 500), mid (S&P MidCap 400), small-cap (S&P SmallCap 600) universe, respectively. But compared

Free Cash Flow Investing

TrimTabs Free Cash Flow

Investment Research

Dividend Income Investing:

A Free Cash Flow Perspective

Vince (Qijun) Chen

[email protected]

212-217-2514

TrimTabs Asset Management

1345 Avenue Of the Americas, Floor 2

New York, NY 10105

Jingtao Chen

[email protected]

212-217-2597

A Note From Our Research Desk | July 2019

mailto:[email protected]

mailto:[email protected]

YIELD

CURVEExecutive Summary

• We believe dividend income investors should consider both the potential future dividend payout as

well as the potential total return (dividend plus net appreciation) when evaluating a strategy.

• Stocks with high past dividend yields have generally maintained high payouts, but with drawdowns.

• For the total US market (S&P 1500 companies), high dividend yielding stocks may outperform overall

stocks on a market cap weighted basis, but may not on an equally weighted basis. In addition,

portfolios with high yielding stocks generally have higher volatility and more severe maximum

drawdowns.

• The outperformance of high dividend yield stocks has been relatively stronger for large-cap stocks

than for mid-, and small-cap stocks. All high dividend yield portfolios with different company sizes

have outperformed on a market cap weighted basis, but mid- and small-cap high dividend yielding

stocks have underperformed when they are equally weighted.

• Using a Free Cash Flow evaluation may help improve the total return of high dividend yield strategies

and generally lead to reduced volatility and less severe maximum drawdowns.

• Free Cash Flow generation as a selection factor may enhance both total return and the risk-adjusted

performance of the high dividend investing strategy, without giving up the ability to generate high

future dividend income. More importantly, the Free Cash Flow generation factor has delivered a more

consistent dividend yield compared to pure high historical dividend yielding stocks.

• For investors looking for more detail information, we have also performed analysis on using Free

Cash Flow Trends, and how a focus on Free Cash Flow may be applied to a sector approach.



July 20192

YIELD

CURVEDividend income investing offers a chance for investors to generate a stream of cash income. It has been widely

applied by equity strategists, especially in the retirement investment space. However, we believe there should be

two components to consider when it comes to dividend investing: dividend income generation and capital

appreciation potential. In other words, for every dollar invested today, investors using a dividend investing

strategy expect cash income in the future, which can be interpreted as the forward dividend yield (future dividends

per share divided by the current price). And, over time, if the investment appreciates, the capital gain together with

the dividend income, is the total return of the portfolio.

One of the most popular dividend strategies is to select companies with high historical dividend yields. But for

dividend investing, we believe investors should also be looking at potential future dividends. So, the question is,

do companies paying high dividends in the past continue to maintain high dividend payouts? Additionally,

what is the performance of high dividend yield companies compared to non-dividend-paying stocks, as

well as to the overall market?

To answer these questions, we conducted an empirical analysis among S&P 1500 companies and analyzed large,

mid, and small companies in the S&P 500, S&P MidCap 400 and S&P SmallCap 600, respectively. We constructed

model portfolios to determine if high dividend paying companies can maintain their payout in the future and,

generally, what the performance is of high dividend yield as a stock selection strategy.

From May 1998 to May 2018, we ranked companies in each universe by trailing-twelve-month dividend yield and

grouped dividend paying companies into quintile portfolios based on yield. We also created a basket of companies

which have not been paying dividends. We then constructed both equally weighted and market cap weighted

portfolios for each of these baskets, rebalanced on a monthly basis.

Future Dividend Yield of High Dividend Yield Stocks. We found that high dividend yield portfolios did provide a

higher weighted average dividend yield in the proceeding twelve months, compared to the average S&P 1500

stock. The highest dividend yield quintile group in S&P 1500 delivered a weighted average of 4.90% past dividend

yield and 4.03% in the next twelve months, compared to 1.83% past dividend yield and 1.77% next-twelve-month

dividend yield for the average S&P 1500 company.



July 20193

YIELD

CURVEPerformance of High Dividend Yield Stocks. We then dug deeper into total returns to answer the second

question: does the dividend strategy outperform stocks that pay no dividend and does the dividend strategy

outperform the general market? With an equally weighted approach, the highest dividend yielding stocks (Top 20%)

in the S&P 1500 did not outperform the S&P 1500 in an equally weighted approach. Looking into different size

groups, the highest dividend yielding stocks outperformed the average S&P 500 company, but that was not the

case for the mid-cap and small-cap universes. On the other hand, with a market cap weighted portfolio construction

approach, the highest yielding stocks outperformed the market cap weighted benchmark in the S&P 1500, as well

as large (S&P 500), mid (S&P MidCap 400), small-cap (S&P SmallCap 600) universe, respectively. But compared

to non-dividend-paying stocks, high dividend yield stocks or dividend-paying stocks, in general, did not produce a

superior return. From a risk perspective, for all universes we modeled with either market cap weighted or equally

weighted portfolio construction, high dividend yield stocks displayed higher volatility and maximum drawdown

compared to the benchmark, but reduced risk compared to non-dividend-paying stocks.

The perspective of Free Cash Flow. At TrimTabs, we focus on a company’s Free Cash Flow conditions to

examine its fundamental strength. In this case, we are interested in whether a company’s Free Cash Flow condition

can help improve dividend investing strategies, not only in generating strong future dividend income, but also

improving the capital appreciation potential.

We extended the dividend strategy by looking at a company’s Free Cash Flow generation, which is whether a

company has generated Free Cash Flow in the trailing twelve months. For each dividend yield quintile portfolio, we

differentiate between dividend-paying companies based on Free Cash Flow generation. We found that inclusion of

consideration of Free Cash Flow improves high dividend yield stocks’ total return performance while delivering less

severe drawdown and reduced volatility. Stocks in the highest dividend yield quintile portfolio with positive Free

Cash Flow generation, for example, outperformed the S&P 1500 by 1.05% (11.63% - 10.58%) on a market cap

weighted basis. And on a risk perspective, looking at Free Cash Flow reduced the volatility, and delivered less

severe maximum drawdown of high dividend yield stocks. Similarly, we looked at the performance of the highest

dividend yield stocks with Free Cash Flow generation in large-, mid-, and small-cap universes respectively, and we

found that the outperformance and risk reduction was also found in each category.



July 20194

YIELD

CURVERegarding dividend income generation, high dividend yield stocks with positive Free Cash Flow deliver slightly

lower yield both in the past and future, but the “reversing effects” are less severe compared to pure high dividend

yield stocks for different universes and weighting schemes. For example, while the weighted average next-twelve-

month dividend yield for the highest dividend yielding stocks with Free Cash Flow generation is 3.97%, or slightly

lower than 4.03% produced by pure highest dividend yield quintile companies, the magnitude of reduction from the

past dividend yield is lower, which was -15.90% (3.97%/4.72% -1) compared to the overall universe’s -17.76%

(4.03%/1.90%-1).

Based on our empirical research results, we believe investors should conduct more rigorous analysis when

selecting a dividend investing strategy beyond just selecting companies with high dividend yield. Free Cash Flow

can be one of the important factors to look at because it may not only help improve the performance without giving

up the ability to generate high future dividend income but may also identify more consistent dividend payers

compared to pure high dividend yielding stocks.

For readers who want more details on this topic, we have also performed an analysis using Free Cash Flow

Trends and demonstrated how this focus could potentially improve dividend income strategies. We have also

analyzed how a focus on Free Cash Flow may be applied to a sector approach to dividend income strategies.

Please contact us for more information.

Our mission is to provide investors with Free Cash Flow based investment products and services to

contribute to their long-term investment success.



July 20195

Measures

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00%

Dividend Yield

PastDividendYield(WeightedAverage)

Overall

No Dividend Payment

Lowest Dividend Yield

Low Dividend Yield

Mid Dividend Yield

High Dividend Yield

Highest Dividend Yield

ForwardDividendYield(WeightedAverage)

Overall

No Dividend Payment


Low Dividend Yield

Mid Dividend Yield

High Dividend Yield


1.83%

0.00%

0.50%

1.27%

1.96%

2.85%

4.90%

1.77%

0.09%

0.73%

1.32%

1.98%

2.76%

4.03%

Past/Forward Dividend Yield by Dividend Yield Quintile PortfoliosS&P 1500 Universe, 11/30/1998 to 05/31/2019

Source: TrimTabs Asset Management, FactSet, S&P GlobalThe past (forward) dividend yield is the trailing-twelve-month (next-twelve-month) dividends paid by a company divided by its market capitalization at the time of calculation. The quintileportfolios are constructed by sorting the total universe by past dividend yields and assigning stocks to five portfolios with an approximately equal number of stocks based on the ranking, on amonthly rebalance basis. Past performance is not an indication of future performance.

TrimTabs Free Cash Flow Investment ResearchDividend Income Investing: A Free Cash Flow PerspectiveStocks with a high dividend yield have maintained relatively high payouts, but with a drawdown

6

Weighting

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13%

CapWeighted

Overall

No Dividend PaymentLowest Dividend Yield

Low Dividend Yield

Mid Dividend YieldHigh Dividend Yield

Highest Dividend YieldEquallyWeighted

Overall

No Dividend Payment

Lowest Dividend YieldLow Dividend Yield

Mid Dividend Yield

High Dividend YieldHighest Dividend Yield

10.40%7.06%

3.93%5.32%

7.75%

7.38%8.54%

10.58%12.23%

10.14%

7.65%

9.01%8.83%

9.57%

Annualized Total Return of Dividend Yield Stocks by QuintilesS&P 1500 Universe, 11/30/1998 to 05/31/2019

Weighting Measures OverallNo DividendPayment

Lowest DividendYield Low Dividend Yield Mid Dividend Yield

High DividendYield

Highest DividendYield

CapWeighted

Annualized Total Return

Annualized Standard Deviation

Sharpe Ratio

Information Ratio

Maximum Drawdown

EquallyWeighted


Annualized Standard Deviation

Sharpe Ratio

Information Ratio

Maximum Drawdown

67.46%

12.32%

48.85%

17.49%

8.54%

49.31%

3.89%

51.96%

14.20%

7.38%

43.40%

9.57%

53.49%

14.50%

7.75%

46.92%

-28.62%

34.80%

15.28%

5.32%

64.16%

-50.88%

21.73%

18.07%

3.93%

63.88%

30.03%

46.96%

22.14%

10.40%

50.25%

0.00%

46.98%

15.03%

7.06%

65.52%

-4.51%

50.93%

19.91%

10.14%

55.66%

-14.40%

57.27%

16.70%

9.57%

53.71%

-29.64%

52.17%

16.93%

8.83%

53.19%

-31.46%

52.37%

17.20%

9.01%

52.99%

-57.05%

42.26%

18.11%

7.65%

53.31%

25.29%

54.08%

22.62%

12.23%

55.24%

0.00%

56.36%

18.78%

10.58%

Detailed Performance Analysis


TrimTabs Free Cash Flow Investment ResearchDividend Income Investing: A Free Cash Flow PerspectiveComparing the returns and risks of dividend yield stocks by quintile portfolios with overall and non-dividend-paying stocks

PortfolioOverall

No Dividend Payment


Low Dividend Yield

Mid Dividend Yield

High Dividend Yield


Portfolios Annualized Total Return

7

S&P 500

Cap Weighted Equally Weighted

0%

5%

10%

10.69%

6.85%

3.23%

8.75%

11.35% 10.94%9.77%

6.72%

Performance of Highest/Lowest Dividend Yield Quintile Portfolios by Different Company Size GroupsS&P 500, S&P MidCap 400, and S&P SmallCap 600 Universes, 11/30/1998 to 05/31/2019

S&P MidCap 400

0%

5%

10%

15%


8.78%9.62%

7.04%

9.57%10.76%

12.83%

7.81%

9.80%

S&P SmallCap 600

Overall No Dividend Payment Lowest DividendYield


Overall No Dividend Payment Lowest DividendYield


0%

5%

10%7.34%

8.63%

4.32%

7.88%

10.89%12.12%

7.70% 7.75%


TrimTabs Free Cash Flow Investment ResearchDividend Income Investing: A Free Cash Flow PerspectiveThe outperformance of high dividend yield stocks has been stronger on large-cap stocks, and with a market cap weighted approach

8

Measures Universe Weighting

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%

AnnualizedTotal Return

S&P 1500 Cap Weighted

Equally Weighted


Equally Weighted

S&P MidCap 400Cap Weighted

Equally Weighted

S&P SmallCap600

Cap Weighted

Equally Weighted

Returns and Risks for the Highest Dividend Yield Stocks and their combinations with Free Cash Flow GenerationS&P 500, S&P MidCap 400, and S&P SmallCap 600 Universes, 11/30/1998 to 05/31/2019

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% 22% 24%

AnnualizedStandardDeviation


Equally Weighted


Equally Weighted

S&P MidCap 400Cap Weighted

Equally Weighted

S&P SmallCap600

Cap Weighted

Equally Weighted

Source: TrimTabs Asset Management, FactSet, S&P GlobalThe past (forward) dividend yield is the trailing-twelve-month (next-twelve-month) dividends paid by a company divided by its market capitalization at the time of calculation. HighestDividend Yield portfolio consists of stocks from top quintile ranked by dividend yield. The quintile portfolios are constructed by sorting the total universe by past dividend yields and assigningstocks to five portfolios with an approximately equal number of stocks based on the ranking, on a monthly rebalance basis. Free Cash Flow Generation is a company's trailing-twelve-monthreported Free Cash Flow. Stocks with the highest dividend yield and positive Free Cash Flow generation are assigned to Dividend Yield + Free Cash Flow Generation portfolio. Pastperformance is not an indication of future performance.

TrimTabs Free Cash Flow Investment ResearchDividend Income Investing: A Free Cash Flow PerspectiveEvaluating the Free Cash Flow conditions of high dividend yielding stocks helped improve the returns with reduced volatilities historically - 1

PortfolioHighest Dividend Yield

Highest Dividend Yield + Free Cash Flow Generation

9

Universe Weighting Portfolio Annualized Total ReturnAnnualized Standard

Deviation Sharpe Ratio Information Ratio Maximum Drawdown

S&P 1500 CapWeighted


Highest Dividend Yield +Free Cash Flow Generation

EquallyWeighted



S&P 500 CapWeighted



EquallyWeighted



S&P MidCap400

CapWeighted



EquallyWeighted



S&PSmallCap600

CapWeighted



EquallyWeighted



62.08%

67.46%

31.33%

12.32%

0.63

0.49

16.83%

17.49%

10.66%

8.54%

60.53%

65.52%

10.95%

-4.51%

0.61

0.51

18.92%

19.91%

11.63%

10.14%

58.65%

68.26%

30.78%

16.46%

0.62

0.51

16.27%

17.31%

10.14%

8.75%

61.12%

66.70%

28.82%

12.15%

0.69

0.58

18.04%

18.89%

12.46%

10.94%

51.63%

54.33%

19.63%

6.59%

0.65

0.54

17.17%

17.64%

11.13%

9.57%

57.33%

64.63%

7.78%

-9.06%

0.60

0.49

19.10%

20.13%

11.55%

9.80%

58.80%

60.92%

10.17%

3.87%

0.46

0.41

19.07%

19.25%

8.72%

7.88%

65.37%

67.84%

-20.84%

-27.00%

0.38

0.34

22.19%

22.86%

8.49%

7.75%

Detailed Performance Analysis for the Highest Dividend Yield Stocks and their combinations with Free Cash Flow GenerationS&P 500, S&P MidCap 400, and S&P SmallCap 600 Universes, 11/30/1998 to 05/31/2019


TrimTabs Free Cash Flow Investment ResearchDividend Income Investing: A Free Cash Flow PerspectiveEvaluating the Free Cash Flow conditions of high dividend yielding stocks helped improve the returns with reduced volatilities historically - 2

10

Portfolio

0.00% 0.50% 1.00% 1.50% 2.00% 2.50% 3.00% 3.50% 4.00% 4.50% 5.00% 5.50%

Dividend Yield (Weighted Average)

HighestDividend Yield

HighestDividend Yield +Free Cash FlowGeneration

4.90%

4.72%

4.03%

3.97%

Forward Dividend Yield Compared to Past Dividend Yieldfor Highest Dividend Yield Stocks and Highest Dividend Yield Stocks with Free Cash Flow GenerationS&P 1500 Universes, 11/30/1998 to 05/31/2019

Portfolio

-50.00% -45.00% -40.00% -35.00% -30.00% -25.00% -20.00% -15.00% -10.00% -5.00% 0.00%

%Change

HighestDividend Yield

HighestDividend Yield +Free Cash FlowGeneration

-17.67%

-15.90%

Percentage Change, Forward Dividend Yield/Past Dividend Yield


TrimTabs Free Cash Flow Investment ResearchDividend Income Investing: A Free Cash Flow PerspectiveA focus on Free Cash Flow hasn't lower much of the future dividend yield comparatively, but actually improved the consistency

Portfolio, Measure NamesHighest Dividend Yield, Forward Dividend Yield

Highest Dividend Yield, Past Dividend Yield

Highest Dividend Yield + Free Cash Flow Generation, Forward Dividend Yield

Highest Dividend Yield + Free Cash Flow Generation, Past Dividend Yield

Portfolio, Measure NamesHighest Dividend Yield, %Change

Highest Dividend Yield + Free Cash Flow Generation, %Change

11

Definitions, Risks and Disclosures

The fund’s investment objectives, risks, charges and expenses must be considered carefully before investing. The prospectus contains this and other

important information about the investment company, and it may be obtained by calling 18006170004. Read it carefully before investing.

Fund holdings and/or sector allocations are subject to change at any time and are not recommendations to buy or sell any security.

Investing involves risk. Principal loss is possible. There is no guarantee that TTAC will achieve its investment objective. Investing involves risk, including

the possible loss of principal. Because the Fund is an ETF (rather than a mutual fund), shares are bought and sold at market price (not NAV), may trade at a

discount or premium to NAV, and are not individually redeemable. Owners of the shares may acquire those shares from the Fund and tender those shares

for redemption to the Fund in Creation Unit aggregations only, consisting of 25,000 shares. Brokerage commissions will reduce returns. Investments in the

Fund include risks associated with small and midcap securities, which involve limited liquidity and greater volatility than largecap securities. Past

performance does not guarantee future results. To obtain fund performance call 212-217-2514 or visit www.trimtabsfunds.com. Index performance is not

indicative of fund performance.

The TrimTabs All Cap US Free‐Cash‐Flow ETF is distributed by Quasar Distributors, LLC.

Free Cash Flow (FCF) represents the cash that a company is able to generate after accounting for capital expenditures.

Standard deviation is a measure that is used to quantify the amount of variation or dispersion of a set of data values.

Downside deviation is a measure of downside risk that focuses on returns that fall below a minimum threshold or minimum acceptable return (MAR).

Sharpe ratio is a way to examine the performance of an investment by adjusting for its risk.

The information ratio (IR) is a measurement of portfolio returns beyond the returns of a benchmark, usually an index, compared to the volatility of those returns.

Maximum drawdown is an indicator of the risk of a portfolio chosen based on a certain strategy.

The S&P Composite 1500 combines three leading indices, the S&P 500, the S&P MidCap 400, and the S&P SmallCap 600 to cover approximately 90% of the U.S.

market capitalization.

The S&P MidCap 400 Index, more commonly known as the S&P 400, is a stock market index from S&P Dow Jones Indices. The index serves as a barometer for the

U.S. mid-cap equities sector and is the most widely followed mid-cap index.

The S&P SmallCap 600 Index is a stock market index established by Standard & Poor's. It covers roughly the small-cap range of US stocks, using a capitalization-

weighted index.

The Standard & Poor’s 500, often abbreviated as the S&P 500, or just the S&P, is an American stock market index based on the market capitalizations of 500 large

companies having common stock listed on the NYSE or NASDAQ.

The Standard & Poor’s Stock Index (S&P 500) is an unmanaged index generally representative of the U.S. stock market, without regard to company size. It is not

possible to invest directly in an index.

This material is provided for general and educational purposes only and is not intended to provide legal, tax or investment advice or to avoid legal penalties

that may be imposed under U.S. federal tax laws. Investors should contact their own legal or tax advisors to learn more about the rules that may affect

individual situations.



July 201912

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Documents

Dividend Income Investing: A Free Cash Flow Perspective · 2020-06-03 · as large (S&P 500), mid (S&P MidCap 400), small-cap (S&P SmallCap 600) universe, respectively. But compared