HIGH DIVIDENDS: MYTH VS. REALITY A STUDY OF DIVIDEND YIELDS, RISK AND RETURNS

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1 HIGH DIVIDENDS: MYTH VS. REALITY A STUDY OF DIVIDEND YIELDS, RISK AND RETURNS

2 EXECUTIVE SUMMARY This paper examines the relationship between dividend yields, risk and returns, through an exhaustive analysis that was performed across the global equity universe. The analysis covers the period from and shows that: Dividend paying stocks have, over time and based on numerous metrics, materially outperformed non-dividend paying stocks. This outperformance generally increases as the dividend yield increases, with the highest return for 10- dividend payers and the second highest return for above dividend payers. Various risk measures show that the risk of dividend paying stocks is lower than non-dividend paying stocks. More surprisingly, 6-10% dividend payers show similar risk to 0-2% and 2-6% dividend payers. Risk-adjusted returns generally increase with dividends, with the highest risk-adjusted return coming from 10- dividend payers. Interestingly, stocks in this dividend range of 10- are often not included in dividend indexes and funds. This lack of interest by the financial community creates a significant opportunity for investors. Finally, contrary to perception that dividend stocks may be currently overvalued, dividend stocks trade at discounts to their historical valuations across dividend categories.

3 THE IMPORTANCE OF DIVIDENDS Unless noted otherwise, all charts and data referenced in this paper are derived from a comprehensive dividend analysis completed by Indxx, a company specializing in analytical research. The impending retirement of baby boomers is expected to lead to a surge in demand for income producing investments. US Treasuries are losing their viability as current income instruments, as their low yields cannot keep up with inflation and are resulting in an erosion in purchasing power over time. According to the US census bureau, 13% of the population in the U.S. is classified as retired (greater than 65 years of age). This group owns a disproportionate amount of household financial assets. Considering that average life expectancy in the US is around 79 and increasing, these individuals often rely, for decades, on regular income from their investments to meet their expenses. With an increasing number of baby boomers (born from ) joining this group every day, demand for current income products is expected to increase in the years ahead. In the past, these investors relied overwhelmingly on fixed income products (bonds), and US Treasury bonds were usually considered the primary vehicle of investment for them. They could invest in these bonds, backed by the credit of the US government, and generally earn decent yields to live on and pay expenses. However, for the past few years, US Treasuries have been trading at extremely low yields. For example, 3 month Treasury Bills are trading at an annual yield of 0.10%, compared to a 50 year historical average of 4.55% 1. Another popular Treasury, the 10 year note, yields a meager 1.66%, down from around 5.25% 2 before the financial crisis struck in It has not been this low since the 1940s, and spent most of the past seven decades in the 4% to 8% 3 range, peaking at more than 14% in the early 1980s. To make matters worse, these rates are likely to remain low for the next few years, as the US Federal Reserve (which controls monetary policy) has indicated that it will keep interest rates low until at least These yields are too low to even keep up with inflation, and as a result investors who rely on them alone to provide them with income going forward may have their purchasing power reduced. In the past, two other traditionally safe, income generating investments were TIPS (Treasury Inflation Protected Securities) and investment grade corporate bonds. TIPS are US Treasuries with a built-in hedge against inflation, but over the last few years they too have seen their yields drop significantly. The hedge only works if inflation rises sharply beyond market expectations and, in normal inflation scenarios, TIPS cannot make up for the erosion in purchasing power illustrated earlier in the discussion. Investment grade bonds, which are issued by corporations, are also paying out very low yields (see Table 1). Due to this drop in yields, investors that rely on their investment portfolios for income have been driven into riskier parts of the market, like junk bonds. 1 Federal Reserve database for secondary market 90D T-bill yield, Federal Reserve database for 10 year Treasury note yield, Annual inflation data for US available at inflationdata.com, 2012.

4 Figure 1: Average Yield by Asset Class 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% Inflation ~ 3% While yields on junk bonds are higher than the Treasury or investment grade markets, they have dropped from 8.29% to 6.59% in one year, while new issuance has grown to $243 4 billion as of October 2012, compared to $167 billion the year before. These junk bonds have resulted in investors taking on greater risk, due to the lower credit ratings and higher instability of these companies to pay income on their bonds. Dividends paid out by corporations can serve as an alternative for investors looking for additional current income to cover their needs and offset the risk of inflation. If we consider yields for 10 year investment grade bonds issued by blue chip corporations, they are providing yields in the range of 1.75%-2.25%. In Table 1, we compare the bond yields for some of these companies with their dividend yields. Table 1: Corporate Bond Yields vs. Stock Dividend Yields* Company Bond Yield Dividend Yield The dividend yields of blue chip stocks are significantly higher than bond yields from these same companies. Coca-Cola Co. 1.89% 2.68% Wal-Mart Stores Inc. 1.91% 2.18% 3M Co. 1.92% 2.57% Proctor & Gamble Co. 1.94% 3.12% Chevron Corp. 2.23% 3.27% PepsiCo Inc. 2.27% 3.01% * Annual Yields as of 12/05/12 As we can see from Table 1, the yield on 10-year investment grade corporate bonds issued by these companies is significantly lower than the dividend yields achieved by investors when owning their stocks. An analysis of these companies and others leads us to conclude that returns on bond investments are very low and, at present, provide lower income than the stocks for many of these companies. However, unlike fixed cash payment from bonds, dividends are changed by corporations according to their capital needs and financial positions. So, owning just one stock can lead to some uncertainty about dividend payments. However, owning a broader range of diversified stocks can help reduce this risk and uncertainty. For example, the S&P 500 index includes some stocks that do not pay dividends consistently and some that pay no dividend at all. Yet the dividend yield for this index over the last 4 years has ranged from 1.8% to 3.2% 5, which is significantly higher than the current yield on a 10 year Treasury. Dividends can also serve as a hedge against inflation since, historically, the dividend yield for the S&P 500 has had a correlation of with the 4 Article published on efinancialnews.com titled Junk Bond Yield Sink even Lower. Data is sourced from Dealogic. Data as of 10/31/ Bloomberg 6 Correlation on dividend yields for the S&P 500 index and annual US inflation data during the period For illustrative purposes

5 Dividend payout ratios for S&P 500 companies have dropped from 52% in 1975 to 27% today, which suggests that US companies have enough cash on hand to continue to pay dividends consistently. This dividend yield study addresses the common concerns of investors about high dividend yielding stocks, such as perceived higher risk, low potential for price appreciation, and unattractive valuations. US inflation rate. However, it should to be considered that, historically, the S&P 500 dividend yield has failed to keep up with significant, rapid spikes in inflation. Historical dividend yields for the S&P500 have rarely been above 6%, while the US experienced significantly higher annual inflation from In comparison, 10 year Treasuries were providing double digit yield at that time. However, over a longer horizon, dividend growth for S&P 500 constituents has managed to outpace inflation in the US. For example, from , the average annual inflation rate was 4.23%, while the growth in dividends from S&P 500 stocks was 5.62% 7. In addition, from , earnings for the S&P 500 grew by nearly 7.34% on an annualized basis. Finally, these positive trends have continued despite a drop in dividend payout ratios, to a current ratio of 27%. This is significantly lower than the historical average of approximately 50%, and as a result US companies have record amounts of cash on their balance sheets. Because of all of this, we expect dividend growth to be sustained in the future and to continue to outpace inflation. However, investors often have concerns about dividend paying stocks, especially those with high yields. First, there is a general perception that there simply aren t that many stocks with high yields that pay dividends consistently. Another concern is that some stocks only appear to have high yields because they have seen their prices drop significantly. As a trend, this was clearly visible during , when most financial and insurance sector companies had high dividend yields due to sharp deteriorations in their stock prices. Another concern is that high dividend yields may be unsustainable and companies that pay out high dividends may cut or eliminate them in the future. There are also concerns that high dividends are only paid by companies that have reached a mature or declining phase of their businesses and therefore have limited price appreciation potential when compared to high-growth companies that do not pay dividends. A final issue that investors often raise is that there is currently too much focus on dividend stocks and that, as a result, these stocks must be trading at premiums to the market. This study intends to address all these questions and perceived issues while exploring the relationship between risk and return with dividend yield. 7 Bloomberg For illustrative purposes

6 A STUDY OF VARIOUS DIVIDEND GROUPS METHODOLOGY OF THE STUDY For the study, we examined the entire global equity security universe, screening out stocks that did not meet minimum liquidity or market capitalization requirements. This was to ensure that any stocks we included in this study were investable and likely to be included in an index. We then divided the remaining eligible securities into different groups on the basis of dividend yield. To facilitate the analysis, we created six groups of 60 securities each, covering six dividend yield ranges of 0% (or non-dividend payers), stocks paying 0%-2% dividend yields, 2%-6%, 6%-10%, 10%- and stocks paying dividend yield above. This methodology was applied for the last 10 years ( ) for each dividend group, and our analysis is based on the results of this exercise. Please refer to the Appendix for a detailed methodology. RETURNS BY DIVIDEND CATEGORY In the long-run, dividend paying stocks have clearly outperformed nondividend paying stocks. Figure 2: S&P 500 Returns: Dividend Payers vs. Non-Dividend Payers 8 Historically, dividend payers have significantly outperformed non-dividend payers. Dividend Payers S&P500 Non-dividend Payers Index performance shown is for illustrative purposes Past performance does not guarantee future results. In our analysis of global stocks from 2003 to 2012, dividend paying stocks have outperformed non-dividend paying stocks in nearly every period (see Table 2). 8 Ned Davis Research, For illustrative purposes

7 Figure 3: Return (Annualized) for Dividend Groups ( ) 10.8% 11.9% 12.4% 12.7% 18.7% 15.9% In addition, the performance of dividend-paying stocks showed a general improvement in performance as we move towards higher dividend yield categories, and the group containing stocks with dividend yields in the range of 10%- has shown the best returns in the study (Figure 3 on the left). The analysis also reveals that at dividend yields higher than, performance started to decline but is still impressive with the second best returns. Table 2: Return Performance across Dividend Groups 0% 0%-2% 2%-6% 6%-10% 10%- Above * Non-Div Categories by Dividend Yield Time Period 0% 0%-2% 2%-6% 6%-10% 10%- Above * YTD 10.80% 12.21% 10.39% 13.83% 19.09% 17.01% 1 Yr % 12.11% 14.92% 16.68% 25.07% 21.05% KEY TAKEAWAY Total returns increase as dividend yield increases, with highest returns for companies paying yields of 10%-. MYTH vs. REALITY Increasing dividend yield seems to have no negative impact on price appreciation. 3 Yr % 21.40% 25.53% % 33.68% 5 Yr % 3.82% -8.82% -4.40% 4.76% 15.62% Since % % % % % % When we look at returns since inception (Table 3 below), we see quite clearly that, for dividend paying stocks, dividends were a key contributor to total returns. In fact, returns from dividend reinvestment gradually grew with increasing dividend yield, up to a point (stocks with a dividend yield greater than ). Total returns also increased with increasing dividend yields, again up to the same point. Our analysis also reveals that there was no clear relationship between price appreciation and dividend yield, and that increasing dividend yield did not have any significant negative impact on price appreciation. Table 3: Cumulative Returns since Inception Group Price Appreciation Return from Dividends Total Return 0% % 21.06% % 0%-2% % 34.68% % 2%-6% % 79.19% % 6%-10% 70.04% % % 10% % % % Above 92.32% % % In bear markets, stock prices face a declining trend, and investors are usually focused on downside protection (minimizing losses). In these markets, a reinvestment of dividends leads to an accumulation of stocks at lower prices, which bring down the average price of the holdings and cut into the potential loss. To illustrate, the period of Q2 was the most significant bear market in the period covered by our study ( ), and was marked by extreme negative events including a For illustrative purposes

8 global recession and financial crisis and the Eurozone sovereign debt crises. Table 4: Returns Analysis - Bear Market ( Q2) In the bear market starting in 2008, all dividend paying categories outperformed nondividend payers. The best performing category was the group with the highest dividend yield (above ). Returns 0% 0%-2% 2%-6% 6%-10% 10%- Above 2008 Q % -9.83% -8.02% -1.49% -9.58% -4.61% 2008 Q2-3.19% -4.84% -5.95% -9.55% % -9.21% 2008 Q % % % % % % 2008 Q % % % % % % 2009 Q1 1.26% 0.29% % % % % 2009 Q % 34.38% 29.01% 27.76% 33.88% 43.32% 2009 Q % 18.50% 13.59% 21.14% 27.30% 46.57% 2009 Q4 3.72% 2.64% 6.69% 2.48% 6.41% 5.33% 2010 Q1 6.59% 3.65% 4.89% 5.53% 9.07% 11.95% 2010 Q % -6.59% % % -8.98% -9.69% Q % % % % % -1.79% As we can see from our analysis, dividend-paying stocks performed significantly better than non-dividend paying stocks during this bear market period. In fact, all dividend paying groups outperformed the nondividend paying group. Wharton Business School professor Jeremy Siegel a famed value investor notes that reinvesting dividends allows investors to take advantage of down markets by buying more shares at cheap prices, which accelerates the upside once the market begins to recover. Value Line, in a 2010 article titled, Yielding to the Allure of Dividends, cites the famous example of the market crash of 1929: Investors unlucky enough to get in at the peak (and hang on) would have had to wait about 25 years for prices to make up their losses. Following the strategy of reinvesting dividends would have shortened the wait by roughly 10 years. Table 5: Return Analysis - Market Recovery (2010 Q Q1) Dividend-paying stocks have historically recouped their losses from bear markets more quickly than non-dividend paying stocks. Non-Div Categories by Dividend Yield Returns 0% 0%-2% 2%-6% 6%-10% 10%- Above 2010 Q % 19.38% 14.80% 18.77% 16.42% 16.03% 2010 Q % 9.49% 7.56% 6.83% 15.06% 2011 Q1 3.27% 1.04% 3.50% 5.53% 5.82% 2.04% 2010 Q Q Q Q % 33.64% 30.09% 34.82% 31.62% 36.24% % 17.29% 0.48% 0.65% -1.70% 33.80% For illustrative purposes

9 Our analysis clearly indicates that recovery of losses was relatively quicker in the case of dividend-paying stocks than non-dividend paying stocks, with almost every dividend group recovering from the 2008 bear market by 2011 Q1. In contrast, non-dividend paying stocks experienced a net loss of more than 20% during the period from Q1. In contrast to bear markets, where investors usually value downside protection, in bull market investors are looking for companies that can generate strong growth potential. Most of stock market literature states that dividends are usually paid by companies which have a limited scope for growth. Therefore, non-dividend paying stocks should outperform dividend paying stocks in a bull market. Let us examine our findings in Table 6. Table 6: Return Analysis for Bull Market ( ) Non-Div Categories by Dividend Yield Returns 0% 0%-2% 2%-6% 6%-10% 10%- Above 2006 H % 8.66% 14.76% 7.65% 6.81% 17.91% 2006 H % 9.68% 23.30% 19.29% 19.41% 27.86% 2007 H % 13.46% 13.84% 20.80% 45.83% 27.02% 2007 H % -0.82% -6.46% 5.90% 9.46% -7.18% 2005Q4-2007Q % 34.10% 50.68% 64.29% % 77.75% As can be seen from our analysis, in a bull market performance of most of our dividend groups lagged non-dividend payers, but the 10%- group actually outperformed, and the group of stocks above was not far behind Table 7: Return Analysis for Bull Market ( ) Group Price Appreciation Return from dividends Total Return Contrary to popular perception, price appreciation potential in bull markets increased significantly with increasing dividend yield, and investment in high dividend yielding stocks in the range of 10%- outperformed non-dividend paying stocks. 0% 74.96% 4.85% 79.81% 0%-2% 30.49% 3.61% 34.10% 2%-6% 40.64% 10.04% 50.68% 6%-10% 45.98% 18.31% 64.29% 10% % 23.25% % Above 60.50% 17.25% 77.75% Unlike in bear markets, dividend income in bull markets formed a smaller part of total returns for dividend paying stocks. However, there is still a trend of increasing returns from dividend reinvestment as dividend yield increases to a point (above ). However, the most surprising trend is the increasing price appreciation with increasing dividend yield. The dividend group of 10%- even outperformed the non-dividend paying group. For illustrative purposes

10 According to a recent Wall Street Journal article, dividend paying stocks have returned 8.92% on average since 1982, compared with just 1.83% for non-dividend payers. 9 Our analysis reveals that dividend paying stocks materially outperformed non-paying stocks. It also reveals that returns increased considerably as dividend yield increased. Specifically, stocks with significantly high dividend yields in the range of 10%- in our study outperformed non-paying stocks convincingly in both bull and bear markets. DIVIDEND PAYERS A LOWER RISK PROPOSITION Dividend paying stocks have experienced lower volatility than nondividend payers due to regular dividend reinvestment and management focus. Dividend reinvestment usually results in the buying of stocks at lower prices in bear markets or in times of economic uncertainty, which reduces the average price of holdings. Due to a lower average price, volatility in stock prices remains limited. Even in bull markets, possibly due to the general trend of preference given by investors to growth stocks rather than dividend stocks, volatility for dividend payers remains lower than non-dividend payers. In addition, dividends add focus to management teams to return cash to shareholders and reinvest earnings only in the best opportunities. Figure 4: Volatility for Dividend Groups Table 8: Volatility Analysis (Standard Deviation) Non-Div Categories by Dividend Yield 0% 0%-2% 2%-6% 6%-10% 10%- Above YTD Yr Yr % 0%-2% 2%-6% 6%-10% 10%- Above 5 Yr Since Inception KEY TAKEAWAY Dividend-paying stocks with dividend yields of up to have shown lower volatility than nondividend paying stocks in both long-term and short-term time periods. In our study, we have used volatility as the typical measure of financial risk. As we can see, volatility decreased significantly from around 24% for non-dividend payers to around 19% for the first 3 dividend-paying groups (up to 10% dividend yield.) Volatility only increased for 10- dividend payers a dividend yield level that is much higher than most people expect for risk to start increasing and still remained lower than the volatility of non-dividend payers. Dividend payers above was the only group that had higher volatility than non-dividend payers. 9 Wall Street Journal, September 15, 2011, The Dividend as a Bulwark Against Global Economic Uncertainty For illustrative purposes

11 Figure 5: Beta for Dividend Groups Table 9: Beta Analysis Non-Div Categories by Dividend Yield 0% 0%-2% 2%-6% 6%-10% 10%- Above YTD Yr Yr % 0%-2% 2%-6% 6%-10% 10%- Above 5 Yr Since Inception We used a beta analysis of the dividend groups to analyze their market risk. As our portfolios consist of global stocks, we used beta with respect to the MSCI All Country World Index for our analysis. In our study, dividend paying stocks had relatively lower market risk, across all groups, than non-dividend paying stocks. Figure 6: Maximum Drawdown for Dividend Groups 65.4% 52.0% 55.9% 53.7% 60.5% 61.1% Table 10: Maximum Drawdown Analysis Non-Div Categories by Dividend Yield 0% 0%-2% 2%-6% 6%-10% 10%- Above YTD 11.68% 7.13% 8.63% 7.78% 6.88% 7.41% 1 Yr % 9.40% 8.63% 8.30% 6.88% 9.97% 3 Yr % 18.53% 20.28% 20.11% 18.59% 24.97% 5 Yr % 52.04% 55.91% 53.71% 60.47% 59.62% 0% 0%-2% 2%-6% 6%-10% 10%- Above Since Inception 65.42% 52.04% 55.91% 53.71% 60.47% 61.14% MYTH vs. REALITY Many investors assume that 6-10% dividend payers are risky while in fact they experienced far less volatility, beta and drawdowns than non-dividend payers and about the same as 0-2% dividend payers. We favor maximum losses or drawdown as a measure of risk for investors. An analysis of maximum drawdown for each dividend group reveals that the maximum drawdown for dividend paying groups was significantly less than non-dividend paying stocks over different time horizons. However, the better drawdown statistics did narrow for the top two dividend categories. Overall, our study reveals that in general, dividend paying stocks had lower risk than non-dividend payers. Furthermore, the risk statistics for 6-10% dividend payers were about the same as 0-2% dividend payers, and only started to increase for dividend payers in the 10- and Above categories, levels that are much higher than often assumed by investors. For illustrative purposes.

12 Figure 7: Sharpe Ratio for Dividend Groups Figure 8: Alpha for Dividend Groups Figure 9: 2012 PE Multiples for Dividend Groups % 0%-2% 2%-6% 6%-10% 10%- Above 1.6% 4.6% 4.8% 5.1% 10.5% 7.3% 0% 0%-2% 2%-6% 6%-10% 10%- Above KEY TAKEAWAY Despite providing the highest risk-adjusted returns, most dividend products do not include stocks with dividend yields in the range of 10%- due to the popular yet unfounded perception that these stocks are more risky BRINGING IT TOGETHER: RISK-ADJUSTED RETURN We combined the Return and Risk metrics from the previous sections to see what dividend categories provided the most attractive risk-adjusted return. A Sharpe ratio is a common method used for the calculation of excess return per unit of risk as measured by the standard deviation. Our analysis of dividend groups reveals that the Sharpe ratio increases consistently with dividend yield, and that only for stocks with a yield greater than did the trend reverse. Alpha is another risk-adjusted measure of the so-called active return of an investment. It is the return in excess of the compensation for the risk borne. Our analysis of dividend groups reveals that Alpha for dividend groups increased with dividend yield. Only for stocks with a dividend yield greater than did the trend reverse, although it remained as the second highest Alpha category after the 10- dividend category. Overall, our analysis reveals that dividend-paying stocks provided significantly higher risk-adjusted returns than non-dividend paying stocks. More surprisingly, dividend paying stocks with dividends in the range of 10%- provided the highest risk-adjusted returns. Interestingly, stocks with a dividend yield in this range are usually not included in most dividend indexes and funds currently available, as it is a common perception that stocks with very high dividend yields are too risky. This lack of interest by the financial community at large creates a very significant opportunity. VALUATIONS BY DIVIDEND CATEGORY There has been significant focus by investors recently on dividend paying stocks, which raises the question of whether prices of dividend paying stocks have appreciated too much and it is too late for investors to participate in the dividend investment segment. Price-to-earnings multiples (Table 11) seem to suggest that, if anything, current valuations across dividend categories are low compared to historical levels. Table 11: P/E Multiple Analysis P/E (x times) % %-2% %-6% %-10% % 0%-2% 2%-6% 6%-10% 10%- Above 10% Above For illustrative purposes.

13 KEY TAKEAWAY Dividend paying stocks are trading at lower valuation multiples than their historical averages. Furthermore, the study reveals that dividend-paying stocks are actually trading at significant discounts to non-dividend paying stocks. Moreover, by comparing the P/E multiples for non-dividend paying stocks to the stocks in the 10%- dividend group for each given year, the table shows that this 10%- group has consistently traded at a significant discount compared to non-dividend paying stocks. This trend is only reversed for stocks with a dividend yield greater than. Stocks with a dividend yield in the range of 10%- have historically provided the highest risk-adjusted returns and are currently the cheapest in the market. Clearly, despite the availability of financial literature that focuses on dividend paying stocks and investors increased focus on dividend paying stocks as a source of income, they are trading at lower multiples than their historical averages. TARGETING THE HIGH DIVIDEND OPPORTUNITY Based on the results of the study, we conducted an analysis of dividend exchange traded funds (ETFs) currently in the market to ascertain whether any are able to capture all the benefits of the high dividend yielding opportunity. In the last 3-4 years, there has been growing awareness among ETF sponsors and investors about the benefits of dividends. There are currently around 54 dividend ETFs in the market, with $59 billion in AUM. 10 The Top 10 products account for nearly $50 billion in AUM, and approximately $17 billion flowed into dividend funds in 2012, with almost 85% of that into the top 10 ETFs. Although these statistics give an indication of the popularity of dividend products, it does not necessarily mean that these products provide access to the attractive dividend segments as identified in our study. An analysis of the top 10 dividend products reveals that the average dividend yield for these products is 3.29% compared to a 2.2% dividend yield for the S&P 500. Table 12: Top 10 Dividend Products in Market by AUM 11 The top 10 dividend ETFs have 85% of the assets in the dividend ETF space, with an average dividend yield of 3.29% vs. 2.2% for the S&P 500. Symbol ETF AUM (US$ Millions) Dividend Yield VIG Dividend Appreciation ETF 12, % DVY Dow Jones Select Dividend Index Fund 10, % SDY SPDR S&P Dividend ETF 9, % DEM Emerging Markets Equity Income Fund 4, % VYM High Dividend Yield ETF 4, % HDV High Dividend Equity Fund 2, % IDV Dow Jones EPAC Select Dividend 1, % DLN Large Cap Dividend Fund 1, % DGS Emerging Market Small Cap Fund 1, % DWX SPDR S&P International Dividend ETF 1, % 10 ETFDb.com as of 08/01/12 11 Indxx, data as of 08/01/12 For illustrative purposes.

14 So-called high dividend or high yield ETFs have average dividend yields of 3%-4%. Global X Funds has developed a product that specifically focuses on the opportunity identified in this study: the Global X SuperDividend TM ETF (NYSE: SDIV). There are 18 ETFs currently in the market that aim to focus on capturing high dividend and/or high yield equities. 12 These funds pay an average yield of 3%-4%. International and emerging market dividend ETFs also do not properly capture the yield potential, and the average yield for these products is 4.34%, with only three products providing a yield above 5%. These products are all in line with the general market perception that high yield stocks usually give low total returns at high risk. Because most if not all dividend indexes, even so called high dividend indexes, miss the most attractive dividend yield categories from a risk-adjusted return perspective identified in our study, Global X Funds has developed a product that specifically focuses on this opportunity: the Global X SuperDividend TM ETF (NYSE: SDIV). The Global X SuperDividend TM ETF provides access to the performance of 100 companies that rank among the highest dividend yielding equity securities in the world. It tracks the Solactive Global SuperDividend TM Index, which includes stocks with dividend yields between 6% and 20% at the annual rebalancing. During rebalancing, components are removed from the index if their dividend yield has fallen below 3%. The index is also reviewed quarterly to eliminate companies that are expected by analyst estimates to cut or eliminate dividends. The 100 stocks are equal weighted with a 1% weight in each component stock as of the annual rebalance date to avoid concentration on any one individual company. ETF Database (ETFdb.com) recently completed a study comparing international and global dividend ETFs. Consistent with the conclusions outlined in this paper, the Global X SuperDividend TM ETF (SDIV) provided the lowest volatility (200-day volatility of 12.3%) and a very high dividend yield (7.5% yield net of expenses). 13 We have also developed a SuperDividend TM Index focused on the high yield opportunity in the US. The Indxx U.S. SuperDividend TM Low Volatility Index was created based largely on the findings of this study. Conclusion Results from our dividend group study indicate that risk-adjusted returns generally increase with dividends, with the highest risk-adjusted return coming from 10- dividend payers, much higher than generally assumed, and a segment generally overlooked by the financial community. 12 Includes all equity ETFs that have high dividend or high yield in the Fund name and Funds with the stated goal of capturing high dividend yields. 13 ETFdb, as of 11/30/12 For illustrative purposes.

15 Appendix Methodology of Dividend Study Country of Domicile Global. Rebalance Date June 30 th. Market Capitalization Market Capitalization greater than $500 million. Turnover Average daily turnover for 6 months greater than $1 million. Public Float - Public float or free float should be greater than 10% of the total shares outstanding of each stock. Screened stocks are divided into different dividend groups based on dividend yield. The six groups are 0% (nondividend payers), 0%-2%, 2%-6%, 6%-10%, 10%-, and Above. The same process is repeated each year from Portfolio Selection Sample of 60 stocks is selected for each year for each group. Due to a lack of stocks over the life of the study, the above group has 20 constituents. Weighting Portfolios for each year for every dividend group are equal-weighted, aside from the distinction below. To remove bias of large-cap stocks in the 0% portfolio, at the time of portfolio selection, a market cap distribution 15% weight to large-cap stocks, 42.5% weight to mid-cap stocks and 42.5% weight to small-cap stocks, is applied. Important Disclosure Carefully consider the Funds' investment objectives, risk factors, charges, and expenses before investing. This and additional information can be found in the Funds' prospectus, which may be obtained by calling GX-FUND-1 ( ), or by visiting Read the prospectus carefully before investing. High yielding stocks are often speculative, high risk investments. These companies can be paying out more than they can support and may reduce their dividends or stop paying dividends at any time, which could have a material adverse effect on the stock price of these companies and the Fund s performance. Investing involves risk, including possible loss of principal. All registered investment companies, including Global X Funds, are obliged to distribute portfolio gains to shareholders at year-end regardless of performance. Trading Global X Funds will also generate tax consequences and transaction expenses. The information provided is not intended to be tax advice. Tax consequences of dividend distributions may vary by individual taxpayer. There is no guarantee that dividends will be paid. To receive a distribution, you must have been a registered shareholder of the relevant Global X Fund on the record date. Distributions are paid to shareholders on the payment date. Past distributions are not indicative of future distributions. Global X Management Company, LLC serves as an advisor to the Global X Funds. The Funds are distributed by SEI Investments Distribution Co., which is not affiliated with Global X Management Company or any of its affiliates.