By Suzanne McGee
(Reuters) – U.S. exchange-traded funds (ETFs) that invest in dividend-paying stocks have seen huge inflows since the Federal Reserve began its rate-cutting cycle last month, although a jump in U.S. Treasury yields could slow the flood of interest rates. investor funds.
The group of 135 U.S. dividend ETFs tracked by Morningstar raised $3.05 billion in September, the same month the Fed cut rates by 50 basis points, the first cut since 2020. That compares with the average monthly inflow of $424 million in the first eight months. from 2024.
Their newfound popularity is due to investors looking for income-generating products in anticipation of the declines in interest rates that are expected to occur as the Fed continues to cut rates.
“The pivot in monetary policy is translating into a search for new homes, and dividend stocks will benefit,” said Nick Kalivas, head of factor and equity ETF strategy at Invesco.
Whether the trend will continue remains to be seen: 10-year Treasury yields have risen in recent weeks, hitting a two-month high on Friday as a booming US employment figure pointed to a resilient economy that the Fed is unlikely to needs even more major cuts this year to achieve results.
Still, Josh Strange, founder and chairman of NOVA’s Good Life Financial Advisors, said the revival of interest in dividend stocks is a response to rising valuations in sectors such as technology and broader markets, in addition to shifts in monetary policy.
At 21.5 times forward 12-month earnings estimates, the S&P 500’s valuation is near a three-year high and well above the long-term average of 15.7, according to LSEG Datastream.
“The S&P 500 has become increasingly concentrated in just a few names, and the momentum has all centered around AI, making these stocks look frothy,” Strange said.
Dividend ETF yields vary by strategy, but can range from just under 2% to as high as 3.6%. By comparison, the yield on ten-year government bonds fell to around 3.6% in September.
Energy and financial stocks often appear in dividend ETFs, including Chevron Corp., JP Morgan Chase and Exxon Mobil. But they also include pharmaceutical companies like Proctor & Gamble, utilities like Verizon (VZ.N> or Southern Co.) and retailers like Home Depot.
“If you’re looking for high dividend payouts, you make a tradeoff: You also want to own companies that will grow and have the ability to increase those payouts,” says Sean O’Hara, president of Pacer ETFs, which looks at dividend prospects discusses. ETFs and related products in the latest edition of Inside ETFs.
To reduce the risk of owning companies with deteriorating fundamentals, Pacer builds ETF portfolios based on companies’ free cash flows, such as the $24.8 billion Pacer US Cash Cows ETF, launched in 2016. It has grown over the past twelve attracted $7.1 billion in inflows for months.
(Reporting by Suzanne McGee; Editing by Ira Iosebashvili and Deepa Babington)