Dividend yields have historically enhanced performance, particularly in an overall environment of low returns, Fitch notes. But dividend-weighted funds often end up with a concentration of exposures to financial, utility and telecoms stocks, sectors which naturally have higher levels of regulation, the ratings firm points out. Recent regulatory decisions concerning utilities in Germany, telecoms in France and banks throughout Europe raise questions about the sustainability of payout levels, Fitch says.

Investors need to conduct a thorough strategic analysis of barriers to entry, pricing power and structural sector trends, says Fitch. Although higher-yielding sectors may have produced excess income in the past, there is no guarantee they will do so in the future.

Exchange-traded funds focussing on income-producing equities have been popular lately, BlackRock pointed out today in a new report on fund flows, attracting US$18 billion worldwide in the first half of 2012. ETFs tracking dividend-weighted equity indices tend to follow a backward-looking approach, selecting stocks with the highest historical dividend payout ratios.

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