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.
Additionally, the S&P 500’s climb to near a four-year high has “whittled away stocks’ yield advantage over bonds,” he said.
“The S&P 500 Index yielded 1.9% on March 28, versus 2.2% for the 10-year U.S. Treasury bond,” Davis wrote. Even so, the ETF yields still look fairly competitive. The SPDR offering’s 12-month yield clocks in at 3.1%, for instance, while the Vanguard ETF’s stands at 2.8%. All of this is more an argument for keeping your expectations in check rather than fleeing from dividend-oriented investments.”
SPDR S&P Dividend
