The aim of the index is to create a robust compounding machine through the creation of a portfolio of companies selected solely on the basis of their ability to provide a high quality income stream to their owners. The relatively high yield - currently 4.5% compared to an historic average of 5% - gives a solid basis upon which to compound capital over time. The requirement that selected businesses enjoy high quality economics ensures dividends are unlikely to be cut. The nature of dividend flows as a share of revenues suggest they will tend to rise, thus affording yield hungry investors a degree of inflation protection.
The Index is based on a stock-selection process of 75 to 125 stocks from the universe that is composed of US stocks that (i) are currently listed on a regulated market of an Eligible Country, (ii) are not financial companies, and (iii) have a free float adjusted market capitalization of at least US$ 3bn. The process is the following:
1) Selection of the stocks with a high quality score (greater than 7) according to Piotroski’s 9 quality factors.
2) Selection of the 40% best scoring stocks in respect to balance sheet.
3) Selection of stocks with high dividend yield.