L&G Global Quality Dividends (LDGL), a seemingly interesting ETF that can certainly generate a stable return for those who are a little more risk-averse than others. I heard about this security from another blogger recently. The fund, with a fee of 0.31% on Avanza, distributes monthly and on a rolling twelve-month basis the direct yield currently amounts to around 4.4%.

The ETF tracks the FTSE Developed All Cap Dividend Growth with Quality Net Tax Index, which can be more briefly said to represent and thus contain companies that primarily meet three criteria:

• Historically positive dividend growth.
• Relatively high expected future dividends.
• Higher than average quality regarding the underlying business in general, but with shareholder-friendly policies in particular.

The direct consequence of this is that companies that are deemed to fall outside the above criteria are excluded. This includes companies that lack a dividend history, have falling dividends, weak balance sheets, low profitability or have weak cash flow generation.

A broad portfolio, where no geography or currency stands out as being particularly large relative to the rest. At the time of writing, the US accounts for around 29%, while Japan accounts for just over 17%. This is followed by the UK, Canada and France, which account for 6.75%, 5.3% and 4.75% respectively.

The sectors studied are, as is often the case when dividends and/or buybacks are a clear goal, financials as overweighted by just over 33% of the total portfolio. Industrials, utilities, consumer cyclical and consumer stable are then found with weights of 19.4% and 8.6%, respectively, and 7.38% and 6.9%.

One of my first thoughts was “a broad portfolio” and on that theme it is noted that the ETF contains approximately 950–975 companies, which is more than several other “competing” ETFs with the same focus. As a direct result of this, the positions are relatively light, which is seen when the top five of the portfolio are studied. The highest weight of “high” 0.48% is held by Japanese Murata Manufactur and Chinese Lenovo. Next comes American Devon Energy at 0.37%, which in turn is followed by South Korean Samsung at 0.35% and Italian Telecom ITAL at 0.33%. I may have missed if it is explicitly stated, but it looks like a kind of “equal weighting” is used – something that has both its advantages and disadvantages. 

Image source: Avanza

As it turns out, this is not an ETF that takes big bites on one or a few companies, but the main purpose is to generate a stable return over time, where about half will come from dividends, half from growth/price development. The fact sheet indicates that over time it has been able to deliver a total return of around 8–10% per year, which is good and slightly above what a global index generates. The fact sheet’s “neutral scenario” shows an annual return of around 7.8% after fees over a five-year period, while the “strong scenario” shows closer to 15% per year. However, it is reasonable to assume that the future will be closer to the lower end of the range than the higher end – hope for the best, but expect the worst. I assume that the ETF will generate similar returns to a global index, albeit just below

If today’s conditions hold and the fund continues to have a yield of around 4–4.5% – or if you buy now and thus get a YoC of the same, a main scenario of a 7% annual total return seems reasonable. This means that approximately half of the return would come from ongoing dividends and the other half from price development. For example, with a total return of 7% and a yield of 4.4%, just under 60% of the return comes from dividends and just over 40% from rising prices. Compared to a traditional global fund, where perhaps 1.5–2% comes from dividends and the rest from price growth, those of us who choose to invest in the ETF receive a significantly larger portion of the return paid out – monthly – on an ongoing basis.

It is relatively rare to find an ETF that combines a dividend yield of around 4–4.5% with such broad diversification. Many popular dividend funds/ETFs concentrate on between 50 and 200 companies, while this ETF effectively provides global exposure (note that Global is more apt here than in a “global fund” as it literally has broad diversification as well as exposure) to hundreds of quality dividend-focused companies.

The FTSE Developed All Cap Dividend Growth with Quality Net Tax Index, as described above, selects out many companies that do not pay dividends or have weaker quality characteristics and thus receives higher exposure to cash-flow-strong, mature and often more stable businesses. At the same time, the exposure to fast-growing growth companies and certain technology giants is lower than in, for example, a global index. The consequence is that the fund will likely lag behind during periods when the market is driven by a few fast-growing technology companies, but it can also withstand better when the market becomes more volatile or when investors again begin to value stable profits and dividends higher.

For those who focus primarily on risk and downside rather than maximizing absolute returns, the L&G Global Quality Dividends UCITS ETF may be an attractive compromise. As mentioned, the ETF does not offer the same potential as a broad global index if the technology sector continues to dominate stock market performance for many years to come. However, we get a higher running monthly dividend, a broader risk spread and a portfolio that consists to a greater extent of companies with proven profitability and dividend history. 

Early this year, I started investing in this ETF and may well consider adding more when there are opportunities in the market. As I believe it complements the other ETFs that are already in my portfolio.