Dividend focused exchange traded funds have experienced rapid growth this year, with many of them doubling their growth, according to a report from Morningstar. Inflows to this sector really spiked in August, proving investors are still searching for yield and stability in the market.
Analysts are not surprised at the investor interest in dividend focused ETFs. For one thing, Treasury and money-market yields are very low, which is helping to push income-focused investors towards dividend stocks.
Total assets in dividend-paying ETFs doubled in the past year to a total of $26.6 billion, reports Sarah Morgan for SmartMoney. As market volatility has increased, the inflows to dividend funds got stronger.
“Market swings also play a role, because dividend stocks tend to be less volatile than the broader market,” Todd Rosenbluth, fund analyst at S&P, said. “We’ve seen investors gravitate towards companies that are perceived to be safer investments,” Rosenbluth said.
However, be forewarned that yield does not equal stability, which can be misleading for investors. A dividend yield usually rises when the stock price falls.
“If you just sort by dividend yield you tend to get companies that are in a distressed state,” Timothy Strauts, an ETF analyst at Morningstar, said. Also, when an investor is looking at international dividend funds, look for funds with a yield above 5% , says Strauts. It is important to pay attention to the holdings of international dividend funds because these can end up concentrated in one or two sectors where dividend pay-outs are high, creating a risk factor.
A few international dividend ETFs:
- SPDR S&P International Dividend (NYSEArca: DWX) -current yield of 7.9%
- WisdomTree International Large Cap Dividend (NYSEArca: DOL) – current yield of 10.8%
A couple of domestic dividend ETFs:
- SPDR S&P Dividend ETF (NYSEArca: SDY) – current yield of 3.4%
- Vanguard High Dividend Yield ETF (NYSEArca: VYM) – current yield of 3.2%
Tisha Guerrero contributed to this article.