With volatility back, bond yields down and speculation that the Federal Reserve sticks to low interest rates, investors may turn to old themes, like dividend-generating stocks and exchange traded funds.
“Investors may be feeling a bit of ‘déjà vu all over again,’ to quote the recently departed Yogi Berra,” Russ Koesterich, Managing Director and BlackRock‘s Global Chief Investment Strategist, said in a research note. “As we have seen in recent years, in a world where the Fed keeps rates anchored at zero, stocks benefit, if only because they compare favorably to cash and negligible bond yields. This is an environment in which some old themes, such as income-producing equities, come back into vogue as investors gird for an even longer spell of ‘low for long’ rates.”
As U.S. equities stumbled over the past few week, bond yields tipped and prices rose, with benchmark 10-year Treasury yields dipping back below 2%.
Additionally, the markets are growing more skeptical of a Fed interest rate hike anytime soon after the weak jobs report hinted at a slowing economy.
Consequently, in a continued low-yield environment, investors may turn to yield-generating stocks as a way to generate more attractive returns.
Investors have a number of high-quality dividend-paying stock ETFs to choose from. The Vanguard Dividend Appreciation ETF (NYSEArca: VIG) tracks U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years and has a 2.44% 12-month yield. The Schwab US Dividend Equity ETF (NYSEArca: SCHD) includes 100 stocks based on strong fundamentals, dividend yields and consistent dividend payouts for at least 10 consecutive years, and it has a 3.2% 12-month yield. The SPDR S&P Dividend ETF (NYSEArca: SDY) holds firms that have a minimum dividend increase streak of 20 years for inclusion and shows a 2.56% 12-month yield. The ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL) only includes companies that have increased their dividends for at least 25 consecutive years and offers a 2.03% 12-month yield.
For higher yielding options, the Vanguard High Dividend Yield ETF (NYSEArca: VYM) has a 3.37% 12-month yield, iShares Core High Dividend ETF (NYSEArca: HDV) has a 4.07% 12-month yield and iShares Select Dividend ETF (NYSEArca: DVY) has a 3.46% 12-month yield.
VYM selects stocks based on annual dividend yield forecasts, excluding more sensitive areas like real estate investment trusts, master limited partnerships and micro-caps. The portfolio includes a collection of large-cap heavy names with an above average yield. HDV also screens picks to account for financially healthy, high-quality U.S. companies with relatively high dividend payouts. DVY tracks 100 high-yielding U.S. stocks and weights components by dividend per share.
For more information on dividend stocks, visit our dividend ETFs category.
Full disclosure: Tom Lydon’s clients own shares of DVY.
Max Chen contributed to this article.