THE BLOG

My Love for Dividend Paying Stocks Made Me Create My Own ETF

When I was a young boy my mother would always tell me "never spend the principal only the dividends." I had no idea what she was talking about. She had a habit of taking a portion of her weekly paycheck and investing it in large cap dividend paying stocks. During her whole life she kept the account secret from both of her husbands. She was a staunch believer that a woman should have financial independence.

After she died I became the executor of her estate and for the first time saw the results of 50 years of investing in only dividend paying stocks. Her returns were stunning. She was not a financial advisor but she believed in the principle that you should get paid while you wait. To her a stock that did not pay a dividend was simply a speculation, not an investment, because you could only make money if the stock went up. Dividends assured her of income and she would only spend that.

Seeing the results of her philosophy changed my mind about investing forever. I did some research. Did you know that over the last 40 years over 70 percent of the markets return came from dividends, not capital appreciation? That settled it for me, today I never invest in stocks that don't pay dividends.

However not all dividend paying stocks are created equally; for example, if a company is borrowing money and increasing its balance sheet debt to pay me a dividend that's a bad thing in my books. So a company's "quality" matters. I like companies that are growing their free cash flow and then increasing their dividend payout each year.

I tend to favor large companies over small ones because preservation of my wealth is on the top of my hit parade and large companies tend to be more stable with stocks that are less volatile than smaller ones.

I also want diversification. I never want one stock to be more than 5 percent of my portfolio or one sector of the economy, like energy, to make up more than 20 percent of my investments. I learned long ago that diversification is the only free lunch in investing because no matter how well thought out any investment strategy is poo poo happens in life so you never want to bet the farm on one stock.

I keep about 50 percent of my family trusts in equities at all times. The other half is in bonds and credits. These days one of the most cost effective ways to invest in equities is with ETFs or Exchange Traded Funds. What is an ETF? Basically an ETF holds a basket of stocks that fit rules created by design to meet specific investment objectives. For example if I wanted to own all the stocks of companies that are bigger than ten billion dollars of market capitalization (which is a measure of company size) and are growing dividends and are historically are less volatile than the market and use less debt, I could make a rule to find them. Creating such a basket of stocks is called designing an index. It takes a lot of work to design and test an index but it's worth doing if you are investing for the long run.

There are approximately 1,700 ETFs on the market today so I though it would be a no-brainer for me to find one that would meet my investment criteria of owning only low volatility large capitalization stocks with high quality balance sheets that pay dividends. My research whittled it down to 50 candidate ETFs but not one encapsulated all the criteria I wanted for the long run.

I have a fair amount of capital to put to work and when it comes to deploying it anybody who watches Shark Tank knows I'm a disciplined investor. So I asked my team to design an ETF for me that exactly fit all my investment criteria of low volatility, quality and dividend yield. That's how O'Shares was born.

Our first ETF is called "O'Shares FTSE US Quality Dividend ETF", now trading under the symbol OUSA and because I wanted OUSA to be liquid and be available to investors globally I decided to list it for trading on the New York Stock Exchange.

I'll never forget what my mother taught me years ago. Never spend the principle only the dividends and that's exactly why I created OUSA. When I ring the bell at the New York Stock Exchange and OUSA starts trading I know she will be by my side. I think she too would have been an OUSA investor.

Before you invest in O'Shares Investment funds, please refer to the prospectus for important information about the investment objectives, risks, charges and expenses. To obtain a prospectus containing this and other important information, please visit www.oshares.com to view or download a prospectus online. Read the prospectus carefully before you invest. There are risks involved with investing including the possible loss of principal.

Concentration in a particular industry or sector will subject the Funds to loss due to adverse occurrences that may affect that industry or sector. The fund may use derivatives which may involve risks different from, or greater than, those associated with more traditional investments. The Fund's emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform the market. Also, a company may reduce or eliminate its dividend after the Fund's purchase of such a company's securities. See the prospectus for specific risks regarding the Fund.

Past performance does not guarantee future results. Shares are bought and sold at market price (not NAV), are not individually redeemable, and owners of the Shares may acquire those Shares from the Funds and tender those shares for redemption to the Funds in Creation Unit aggregations only, consisting of 50,000 Shares. Brokerage commissions will reduce returns.

O'Shares Investment funds are distributed by Foreside Fund Services, LLC. Foreside Fund Services, LLC is not affiliated with O'Shares Investments Inc. or any of its affiliates