Dividend funds, one of the fastest growing segments in the exchange traded fund (ETF) business, could get more attention on news the dividend payout by S&P 500 companies grew by a record $16.6 billion in the first quarter.
Since the start of the year, 117 companies in the S&P 500 either raised or initiated dividends, the Associated Press reported Friday.
Several large banks recently moved ahead with capital plans after passing the Federal Reserve’s second round of stress tests. J.P. Morgan and Wells Fargo were among the lenders that announced dividend hikes, while Citigroup reinstated its dividend. Tech giant Cisco also said it would begin paying a dividend.
Dividend ETFs have been seeing inflows pick up in recent weeks while their prices are hitting highs, TheStreet.com reports.
The $6 billion iShares Dow Jones Select Dividend Index Fund (NYSEArca: DVY) ended the first quarter with a 5.5% gain, trailing the S&P 500 slightly, according to Morningstar. On Thursday, BlackRock launched iShares High Dividend Equity Fund (NYSEArca: HDV).
There are many dividend-themed ETFs and investors should research their unique wrinkles and how the indexes select companies. [3 Approaches to Dividend ETF Investing.]
“There is no free lunch in the market, so the largest dividend yields tend to come from stocks that have fallen substantially or are likely to cut their dividend in the future,” says Morningstar’s Michael Rawson in an analyst report on iShares Dow Jones Select Dividend.
“Income-oriented investors often look to high-dividend-paying stocks as another source of income and as a supplement to fixed-income holdings,” he wrote.
For full disclosure, Tom Lydon’s clients own DVY.