Investors Are Developing a Palate for High Dividend ETFs

Capital inflows into exchange-traded funds (ETFs) are fast approaching $4 trillion in value, and fixed income ETFs, in particular, are seeing more interest from investors. Nonetheless, with the prospect of interest rate cuts and slowing global growth, it seems that safety with respect to income is what investors are preferring, which is leading them to high-dividend ETFs.

In a low-interest rate environment, what is more appealing—the yield or the safety? Jay Jacobs, senior vice president and head of research and strategy at Global X Funds, says it’s the former.

“We’ve seen a lot of flows into our high-income alternatives,” which include riskier dividend plays, Jacobs, whose firm has over $10 billion in assets under management and runs 68 ETFs, said Monday on CNBC’s “ETF Edge.”

“We think this movement this year, a lot of that shift in ETF assets, is looking for yield,” Jacobs said. “And it makes a lot of sense when you consider the macro environment. [With] the Fed maybe, probably cutting rates two or three times this year, people really need to start to find yield again for their portfolio to reach their income targets.”

An ETF that’s worth a look is the Global X SuperDividend ETF (NYSEArca: SDIV). SDIV seeks investment results that correspond generally to the price and yield performance of the Solactive Global SuperDividend Index, which tracks the performance of 100 equally-weighted companies that rank among the highest dividend yielding equity securities in the world, including emerging market countries.

The features of dividend-yielding equities are obvious with regard to the sustained income aspect, but more importantly, given the current market environment, they also possess risk management features that could mute the effects of volatility.

“The potential benefits have been well-documented—dividends have been a large contributor to long-term stock returns over time, and with interest rates poised to remain low, equity dividends are likely to be an important part of that story,” wrote Victory Capital portfolio manager Dan Banaszak. “But perhaps even more important are the potential risk-managing attributes of higher dividend-paying stocks. This is illustrated by a substantially higher standard deviation of non-dividend paying stocks versus dividend payers. At the same time, the highest-yielding companies have outperformed those with zero dividend over the long term.”

Banaszak presented two takeaways:

  1. Scratch below the surface: “It’s not as simple as buying the highest-yielding company or finding those companies with the longest history of paying high dividends. After all, dividend yield is just a percentage—a function of stock price—so a company encountering trouble and a stock declining in price might still sport a very attractive yield. A rigid methodology that ignores fundamentals could include companies with artificially high dividends or even those precariously poised to reduce dividends. High yield by itself is not a reliable marker for a quality company.”
  2. Beware of unintended consequences: “Building a portfolio of high-dividend stocks and weighting it based on market capitalization or dividend yield alone can lead to unintended consequences. Such strategies are likely to be concentrated in their top holdings or overweight in narrow swaths of the economy. Strategies that seek to limit extreme sector exposures and weight securities more evenly can be a more diversified way to access the potential benefits of a high-dividend approach.”

One ETF to consider is the VictoryShares Dividend Accelerator ETF (NasdaqGM: VSDA), which offers exposure to large-cap U.S. stocks, that feature not only a history of increasing dividends, but which also possess the highest probability of future dividend growth. It seeks to provide exposure to dividend growth, rather than yielding, offering a potential diversification benefit to high dividend yielding alternatives, particularly in a rising rate environment.

The fund provides investors with:

  • potentially higher income through the sustainability of future dividend growth.
  • a further layer of risk awareness by beginning with a broad investible universe and investing in high quality companies with stable earnings’ patterns.

For more market trends, visit ETF Trends.