As an alternative to the bond markets, income-minded investors are turning to dividend-paying stocks and related exchange traded funds for a stable source of yields in response to an uncertain interest rate outlook.
“Virtually no bond funds look attractive right now. Investors looking for safety and yield are turning to stocks with low volatility and consistent dividends,” Terri Spath, chief investment officer at Zuma Wealth, told Reuters. “Do we think this is a good direction? We say yes.”
According to Refinitiv Lipper data, investors funneled $6.9 billion to U.S. dividend funds over January, the highest net purchases since October 2006.
The Schwab US Dividend Equity ETF (NYSEArca: SCHD) and the SPDR S&P Dividend ETF (NYSEArca: SDY) were among the most popular plays, attracting about $1.7 billion in inflows each over January.
Quality dividend-paying stocks are seen as a more stable stock market play, with an added bonus of generating some extra cash on the side. The increased demand for dividend-payers comes as there has been elevated volatility in global equities at the beginning of the new year due to a higher rate outlook and elevated inflation levels, which tend to squeeze corporate profit margins.
Dividend funds, on the other hand, are safer plays and provide some stability since they are comprised of well-established names that have better pricing power and a long-term track record of providing stable returns.
“As a total return manager, we do look for capital appreciation when markets are doing well and rely on income from dividends to help when markets become volatile or negative,” Ryan Fause, a portfolio manager at Pinnacle Associates, told Reuters.
“As we see growth stocks struggle and prevailing interest rates still somewhat low, we do find comfort in owning dividend stocks as a core part of most portfolios,” Fause added.
Investors can also target U.S. dividend-growers through a number of ETF options. For instance, the Invesco Dividend Achievers ETF (NYSEArca: PFM) selects companies that have increased annual dividends for 10 or more consecutive fiscal years.
The Invesco Dividend Achievers ETF (NYSEArca: PID) is PFM’s sister fund; it follows the same methodology for stock selection, but chooses foreign companies that trade in the U.S. and on the London Stock Exchange.PFM has an SEC 30 day yield of 1.81%, while PIM has a yield of 3.53%.
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