As investors have continued the search for income-generating products in a lower-rate environment, 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.
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.
“A dividend ETF checks the box as being ‘part return, part stocks,’” according to Ashton, in addition to being viewed as less risky.
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.
As flows into equity income ETFs continue to grow, it is important for investors to differentiate between high-yield funds and dividend-growers — the latter typically signals a product comprised of higher quality companies.
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).
Looking at the nine-year record for all global equity income and global large-cap core ETFs and open-end funds, sorted by nine-year Sharpe ratio, the Guinness Atkinson SmartETFs Dividend Builder ETF (DIVS) is the top ETF offering.
The only fund with a higher Sharpe ratio over a nine-year period is the Morgan Stanley Global Franchise Portfolio (MSFAX), a mutual fund; however, where DIVS beats MSFAX is in consistent return over a five-year period.
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