Artificial intelligence-related companies have captured investors’ attention in recent times. However, dividend-focused ETFs serve as a reminder that there is life beyond the leading players of the new technological revolution and that including income-related vehicles is good protection for portfolios.
The data supports this view, as investment flows into ETFs listed in the United States reached $6.3 billion in April, implying net inflows of $36.9 billion so far this year. This figure is slightly higher than the $35 billion recorded in the same period last year, according to investment flow figures published by First Trust.
At S&P Global, they note that dividends play an important role in generating total equity returns. Since 1926, they have contributed approximately 31% of the total return of the S&P 500, while capital appreciation has accounted for the remaining 69%. Therefore, “sustainable dividend income and the potential for capital appreciation are important factors for total return expectations,” according to the firm.
Companies use stable and growing dividends as a sign of confidence in their business outlook, while market participants view those track records as an indication of corporate maturity and balance sheet strength, according to S&P Global.
ETFs that invest in dividend-paying stocks can be “simple and comprehensive solutions” for those seeking income, according to Morningstar. The firm lists several reasons. The first is that dividend ETFs hold a portfolio of dividend-paying stocks and therefore “offer immediate diversification.”
In addition, dividend ETFs “typically have low costs,” and they are also easy to buy and sell. “Many of the best dividend exchange-traded funds are managed by popular asset managers that have brokerage platforms,” the firm notes. Lastly, investors who want exposure to dividend-paying stocks through an ETF “have a wide variety of good exchange-traded funds to choose from.”
Although dividend ETFs focus on income, each one applies very different strategies and, as a result, their performance can vary considerably from one another. For this reason, Morningstar believes that investors seeking passive income through dividend ETFs “should do their research carefully to understand exactly what the ETF invests in before buying it.”
At VanEck, they point to the shift in the interest rate environment during this decade and the typically resilient performance of high-dividend securities as one of the reasons behind the popularity of some of their dividend ETFs. The firm explains that during the low interest rate era of the 2010s, investors favored “growth at any price.” But current interest rates make the compensation offered by high dividends more attractive. Therefore, they note that dividend strategies can perform well not only in bullish stock markets but also during periods of volatility, although every market cycle is different.
