By Todd Rosenbluth, CFRA
Even as companies kept paying and raising their dividends at a rapid pace, investors shunned dividend-oriented strategies in the first nine months of 2018. However, as market volatility picked up and bond yields moved lower in the fourth quarter, demand for high-dividend yielding securities and funds that hold them gained steam. Perhaps investors recalled that 40% of the S&P 500 index’s total return since 1926 came from the dividend component.
In the fourth quarter of 2018, investors rotated away from more growth-oriented sectors, including Information Technology, and into more defensive sectors such as Consumer Staples and Utilities. The S&P 500 Tech sector’s dividend yield was a below-average 1.5% at yearend, but consumer staples (3.1%) and utilities (3.5%) were two of the three highest-yielding sectors.
Not only did the indices behind the Utilities Select Sector SPDR (XLU) and Consumer Staples Select Sector SPDR (XLP) hold up much better than the broader market in the final three months of 2018, these two ETFs gathered a combined $2 billion of new money, even as sector-oriented ETFs shed $18.5 billion of their assets.
Further, investors added $8.3 billion to dividend-focused ETFs in the final quarter, after removing $3.1 billion in the first nine months of the year. These ETFs provide exposure to multiple sectors, providing diversification benefits. Fourth-quarter dividend increases occurred in sectors that sport below-average and above-average yields.
CFRA rates equity ETFs combining holdings-level analysis and fund attributes such as expense ratio and bid/ask spread and 17 U.S.-focused dividend ETFs earn a top rating of Overweight. While they all have strong attributes, their approach and exposure are often different. Here are a few examples.
iShares Select Dividend ETF (DVY) holds a portfolio of consistent dividend-paying stocks constructed based on yield. The Utilities sector is the largest, at 33% of assets, followed by Consumer Discretionary (13%), Energy (10%), Financials (9%) and Consumer Staples (8%). While out of favor for much of 2018, in the fourth quarter DVY added $1.2 billion in new assets.
Meanwhile, Vanguard Dividend Appreciation ETF (VIG) holds companies that have raised their dividends for ten or more years, which has skewed the portfolio toward different sectors than DVY or SDOG. Industrials (27% of assets), Consumer Staples (17%), Health Care (16%) and Information Technology (13%) were well represented. In the fourth quarter, VIG added $2.1 billion to its coffers.
As investors appropriately look more closely at dividend strategies in the first quarter of 2019, we encourage them to look inside to ensure they have a portfolio that fits with the exposure they want.
Todd Rosenbluth is Director of ETF & Mutual Fund Research at CFRA.
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This article was originally was published on MarketScope Advisor on January 7. Visit https://newpublic.cfraresearch.com/ to gain access.