Dividend funds have seen a surge in popularity over the last year and a half, reaching a record of $7.5 billion in monthly flows in January, according to data from Refinitiv Lipper.
Historically, investors who turn to dividend ETFs are generally those looking for low-risk investments, as well as retirees who want a regular income, but the current environment has increased dividend ETFs’ appeal across all demographics.
Major U.S. stock indexes have had a turbulent start to the year, causing some investors to rotate away from growth ETFs and stocks, namely big tech, in favor of high dividend-yielding investments, moving into sectors including financials and energy.
Rising inflation and predictions that the Federal Reserve will increase interest rates, possibly as early as March, for the first time in over three years has added to investors’ concerns about the economic landscape.
Michael Ashton, managing principal at Enduring Investments, said that investors are likely rotating into dividend ETFs as they are being flushed out of holding cash.
“Cash, when inflation is at 2%, has a 2% cost…but when inflation is at 7%, it is much harder to hold dry powder,” Ashton said.
“A dividend ETF checks the box as being “part return, part stocks,” according to Ashton, in addition to being viewed as less risky.
“In this environment, a good place to hide would be some of these dividend-oriented companies that are going to grind through this market turbulence,” Sandy Villere, a portfolio manager at wealth management firm Villere & Co., told the Wall Street Journal.
When searching for income-generating investments, ETFs holding dividend stocks have advantages over the traditional fixed income offerings. Stocks are riskier than bonds; however, they provide a fairly reliable source of income plus the possibility of capital appreciation over time.
Equities that pay dividends are also typically better-positioned in an inflationary environment than the broader equity market or fixed income investments.
With 149 products currently available to U.S. investors, dividend ETFs have $312 billion in combined assets under management as of February 8, according to FactSet data.
Three highly-rated ETFs include the SmartETFs Asia Pacific Dividend Builder ETF (ADIV), the Guinness Atkinson SmartETFs Dividend Builder ETF (DIVS), and the BlackRock iShares Global 100 ETF (IOO).
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