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Many investors consistently turn to dividend stocks as a reliable source of income, benefiting from the cash flow generated by corporations. This strategy provides reassurance amid the fluctuations in stock prices. With recent surges in volatility in both the stock and bond markets, dividend stocks are gaining traction among investors who typically lean towards equities for growth and yield.
According to ETF Action, there are now over 100 exchange-traded funds (ETFs) that focus specifically on dividend stocks. However, a significant proportion of assets are consolidated within major index funds, including the Vanguard Dividend Appreciation ETF (VIG), Schwab US Dividend Equity ETF (SCHD), and iShares Core Dividend Growth ETF (DGRO).
Top 5 dividend ETFs, by total assets under management
Vanguard Dividend Appreciation ETF: $81 billion
Schwab U.S. Dividend Equity ETF: $65 billion
Vanguard High Dividend Yield Index ETF: $54 billion
iShares Core Dividend Growth ETF: $28 billion
SPDR S&P Dividend ETF: $19 billion
Source: ETFAction.com
As the actively managed ETF sector evolves, more actively managed dividend ETFs are emerging, like the T. Rowe Dividend Growth ETF (TDVG). This fund aims to identify superior dividend-paying companies for a favorable blend of capital appreciation and yield.
Launched in 2020, TDVG was one of the first ETFs from T. Rowe Price, renowned for its traditional mutual funds. The firm now manages 19 ETFs with a total of $13 billion in ETF assets, of which TDVG accounts for over $700 million.
Navigating Tech Sector Exposure
For those wary of technology stocks, particularly following recent market fluctuations, avoiding tech exposure in dividend funds may prove challenging. The leading tech firms are now among the largest dividend payers due to their financial strength. In TDVG, Apple and Microsoft rank as top holdings, each contributing around 5%. These companies are similarly featured in the top positions of Vanguard’s VIG and iShares’ DGRO.
Investors anticipating a turbulent journey for the tech sector can still gain access to its prominent dividend payers without heavily weighting the sector overall, as seen with dividend ETFs like TDVG.
“Currently, we’ve reached a point in the cycle where an excessive emphasis on the ‘Magnificent Seven’ tech stocks may have peaked,” noted Todd Sohn, head of ETFs at Strategas, during a recent segment on CNBC’s “ETF Edge.”
“While these stocks are unlikely to crash completely, their values may become diluted if one stock is overemphasized relative to others,” he added.
In addition to Apple and Microsoft, TDVG’s holdings include Visa, JP Morgan, and Chubb, with approximately 19% exposure to technology, compared to nearly 30% for the S&P 500.
Tim Coyne, head of T. Rowe Price’s ETF business, echoed Sohn’s remarks, stating that the prevailing themes of income and dividend payments have resulted in significant inflows into dividend-focused ETFs this year.
So far in 2023, dividend ETFs have attracted over $10 billion in inflows, aligning closely with other “factor-based” investment approaches in the U.S. market, according to ETF Action data. However, value-focused ($12 billion) and growth ETFs ($15 billion) have seen slightly higher inflows.
Top dividend ETFs, by year-to-date performance
Franklin U.S. Low Volatility High Dividend Index ETF: 3.7%
Opal Dividend Income ETF: 2.3%
iShares Core High Dividend ETF: 1.9%
First Trust Morningstar Dividend Leaders Index Fund: 0.7%
Monarch Dividend Plus ETF: 0.2%
Source: ETFAction.com
Coyne emphasized the advantages of actively managed dividend ETFs, especially in volatile markets. Unlike passive funds, which adjust holdings only during scheduled rebalancing, actively managed funds can respond to market shifts and stock momentum, targeting both dividend income and long-term price appreciation for their holdings.
Currently, active dividend ETFs haven’t rivaled the popularity of their passive counterparts. As of 2023, passive funds have garnered about $7 billion in inflows, while their active counterparts have attracted approximately $3.7 billion, according to ETF Action. The predominance of dividend stock index ETFs continues, partly due to their lower costs. For instance, while TDVG has an expense ratio of 0.50%, Vanguard’s VIG charges only 0.05%.
Sohn believes that actively managed dividend ETFs will gradually gain traction as more managers seek dividend-paying, appropriately valued companies, viewing dividends as an added benefit.
Typically, retirees relying on fixed incomes are the primary beneficiaries of a dividend investment strategy. “Older individuals often prefer a steady stream of income rather than depending on bi-weekly paychecks,” noted Sohn. However, he added that the dividend stock strategy is appealing to various investor demographics, particularly amidst elevated risk in the bond market, where the quest for yields intensifies.
Top dividend ETFs by current yield
Invesco KBW High Dividend Yield Financial ETF: 14%
Hoya Capital High Dividend Yield ETF: 11%
Invesco KBW Premium Yield Equity REIT ETF: 10%
Infrastructure Capital Equity Income ETF: 9.7%
KraneShares Value Line Dynamic Dividend Equity Index ETF: 9.2%
Source: ETFAction.com
While these high-yield dividend ETFs have encountered performance challenges recently, with the top five yielders experiencing declines between 5% and 11% year-to-date, funds focused on strong overall performance have exhibited lower yields. The top-performing dividend ETFs yield between 1.3% and 4.2% over the past twelve months.
Caution Against Yield-Only Decisions
On CNBC’s “ETF Edge,” host Bob Pisani cautioned against the pitfalls of investing solely based on yield. Often, the highest dividend payers may face greater risks of dividend cuts should their financial health falter, as seen in the oil and gas sector. Despite past struggles, many companies have since recovered, highlighting the importance of striking a balance between consistency in dividend payments and potential for capital appreciation.
Remarkably, one of the year’s standout stocks, Warren Buffett’s Berkshire Hathaway, offers no dividends at all. Yet, a new ETF aims to bridge that gap.
Coyne pointed out that concerns over a company’s ability to maintain dividend payments underscore the value of active management. With increasing market volatility and variability in stock performance across sectors, navigating these uncertainties can be crucial.
As the landscape of global trade becomes more contentious, the cash flows of U.S. corporations may face renewed scrutiny. Challenges in overseas revenues and profit margins may arise, prompting investors to consider dividend payers as a more appealing option, especially as bond markets experience atypical stresses. Although it’s premature to declare a systemic “credit problem,” Sohn noted a widening of spreads in both the corporate bond market and credit default swaps, with a notable withdrawal from high-yield funds.
“Opting for excessively high yields can be perilous, especially in troubling credit environments for corporate America,” Sohn remarked.
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