For many investors, it’s always a good time for dividend stocks, with the income component coming to shareholders from the cash flow of corporations providing peace of mind regardless of short-term ups and downs in stock prices. But now, as the stock and bond markets both see sharp spikes in volatility, dividend stocks may appeal to an even wider group of investors, playing more of a role in-between equities growth and yield.
There are now over 100 exchange-traded funds focused on dividend stocks, according to ETF Action, though the vast majority of assets are concentrated in the biggest index fund ones, including 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 space continues to grow, there are a growing number of actively managed dividend ETFs, such as the T. Rowe Dividend Growth ETF (TDVG), with the managers betting that they can identify higher-quality dividend payers that generate a better mix of capital appreciation and yield.
TDVG was one of the first ETFs that T. Rowe Price, which is known for its traditional mutual funds, launched in 2020. The company now has 19 ETFs in all and $13 billion in ETF assets. The dividend ETF has over $700 million in assets.
Can’t avoid but can limit tech
Investors looking to avoid tech stocks given the recent market rough patch, though they did bounce back sharply last week, can’t do that in this dividend fund, with the biggest tech companies now also the biggest dividend payers given how cash-rich and reliable they have become. TDVG’s top holdings are Apple and Microsoft, each at around 5%. They are also among the top holdings in Vanguard’s VIG and iShares’ DGRO.
Investors who expect the overall tech sector ride to continue to be bumpy can get exposure to some of the tech industry’s biggest dividend payers while not overweighting the tech sector as a whole, like the S&P 500 Index, through dividend ETFs like TDVG.
“We’ve finally reached a point in the cycle where overweighting the ‘Mag 7’ all of them, has hit its limit,” said Todd Sohn, head of ETFs at Strategas, on last week’s CNBC “ETF Edge”
“It’s not going to zero but watered down a bit, or you overweight one name and underweight the rest,” he said.
TDVG’s biggest holdings after Apple and Microsoft are Visa, JP Morgan, and Chubb. Its overall exposure to the tech sector is roughly 19%, versus close to 30% for the S&P 500.
Tim Coyne, head of T. Rowe Price’s ETF business, said alongside Sohn on “ETF Edge” that the macro themes of income and dividend payment have led to strong inflows across the ETF industry’s dividend funds.
With over $10 billion in flows year-to-date into dividend ETFs, the category is keeping pace with other “factor-based” approaches to investing in the U.S. stock market, according to ETF Action data, but value ($12 billion) and growth ETFs ($15 billion) have still take in slightly more in flows from investors.
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 says that active managed dividend ETFs, in particular, make sense for investors in a volatile market. Passive dividend funds are by their nature more static in what they hold, because they only change stocks as part of regularly scheduled rebalancing periods, not in response to any change in momentum or overall market environment. TDVG seeks the dual goals of payment of dividend income but also long-term capital appreciation in the prices of the stocks it holds.
Actively managed dividend ETFs don’t rival the index ETF options in popularity, at least not yet. Passively managed dividend ETFs, consistent with the broader investor trend, have taken a majority of the flows, at roughly $7 billion, versus $3.7 billion for actively run dividend ETFs, according to ETF Action. Dividend stock index ETFs continue to have a big lead, Sohn said, with one reason being much lower cost. “I could buy dividend ETF for just a couple of basis points, but you are seeing more active players,” he said.
TDVG has an expense ratio of 0.50% (or 50 basis points). Vanguard’s VIG, by comparison, charges 0.05%(or 5 basis points).
Sohn says actively managed dividend ETFs should make some more progress in gathering assets over time. “You’ll start to see more traction among active managers who will also focus on looking for companies that are paying out dividends, or at least properly valued, and they have this dividend too, as a kind of a bonus in a sense.”
It is retirees living on a fixed income who typically benefit the most from a dividend investment strategy, “older folks who want that stream of income, because they’re not so reliant on a paycheck every two weeks,” Sohn said.
But he added that looking at dividend stocks does make sense for many types of investors. That is especially true, he said, at a time of elevated risk in the bond market, where investors most often pursue yield.
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
The highest-yield dividend ETFs have had their short-term performance issues, too, with the top five yield payers seeing performance declines of between 5% and 11% year-to-date, according to ETF Action. The top dividend ETFs by performance, by contrast, pay much lower yields, with the top five having trailing twelve-month dividend income levels of between 1.3% and 4.2%.
Never buy on yield alone
“ETF Edge” host and CNBC Senior Markets Correspondent Bob Pisani cautions investors against buying a dividend fund based on yield alone. The highest dividend payers on a percentage basis may also be the ones most vulnerable to dividend cuts if their financial position weakens. The recent example was the energy sector, where many of the big oil and gas companies had hefty dividends that become vulnerable when their balance sheets came under strain in recent years, though they have since recovered. Finding a balance of stocks that are consistent dividend payers while also offering capital appreciation should be the goal.
One of the market’s best stocks of all this year pays no dividend and never has: Warren Buffett’s Berkshire Hathaway — though a new ETF is attempting to address that.
Coyne said that’s where active management can come into play, “navigating markets as you see an increase in volatility and even dispersion of stock returns within sectors, or across industries.”
The cash flows of corporations will be put to a new test in a period of global trade war that could lead to risks for overseas revenue bases of U.S. companies, as well hits to their profit margins. But solid dividend payers may be attractive to investors in a market where bonds have been under atypical stress due to the Trump administration’s economic policy. While it would be going too far to says there is a “credit problem” in the market right now, Sohn noted spreads on bonds have widened in both the corporate bond market and the CDS market, and investors have been pulling out of high-yield funds.
“You don’t want to go super-high yield when the credit backdrop deteriorates for corporate America,” Sohn said.
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