The S&P 500 keeps rising and dividend exchange traded fund investors are feeling more confident as they start to favor growth over yield.
Over the past month, total returns of the two most popular dividend funds, the growth-minded Vanguard Dividend Appreciation ETF (NYSEArca: VIG) and the value-oriented iShares Dow Jones Select Dividend ETF (NYSEArca: DVY), have begun showing similar performances. [Vanguard’s Dividend Appreciation ETF]
Over the past three months, VIG has lagged behind DVY by 1.8 percentage points, and over the past three years, the performance gap was 2.4 percentage points.
“Investors have been driving up valuations for dividend ETFs with the highest payouts, ignoring longer-term growth patterns,” Carl Camp, president at Eclectic Associates, said in a Wall Street Journal article. [An Attractive Dividend ETF Outperforming the S&P 500]
“Normally, firms with lower payout ratios and higher forecasted growth rates trade at premium valuations,” according to Michael Rawson, a Morningstar analyst. “But investors have been turning those historic relationships on their ear in their quest for higher yields.”
However there is a growing shift in dividend ETFs.
“We’ve seen the signs of a change in market leadership and that has filtered through to dividend funds less tilted to defensive sectors like utilities,” Doug Flynn, co-founder of Flynn Zito Capital Management, said in the article.