Dividend ETFs have been enormously popular the past year but investors should be careful to temper their expectations. A rising stock market means valuations aren’t as cheap, while conservative investors need to remember equities are more volatile than bonds.
“Tread cautiously before dumping bond funds for stock funds,” says Morningstar senior fund analyst Christopher Davis. “Dividend-focused offerings may usually be less volatile than other sorts of stock funds, but tough markets can more than wipe out the small cushion their yield provides against losses.”
Also, while dividend payers were “relatively attractive on valuation grounds a year ago, they don’t appear cheap after stocks’ recent gains,” he said.
Dividend ETFs such as iShares High Dividend Equity (NYSEArca: HDV), SPDR S&P Dividend (NYSEArca: SDY) and Vanguard High Dividend Yield (NYSEArca: VYM) look “fairly valued,” Davis wrote in a report Tuesday.