Investors Flock to Dividend-Focused ETFs Amid Rate Cut Cycle
As the Federal Reserve embarked on its rate-cutting journey last month, U.S. exchange-traded funds (ETFs) investing in dividend-paying stocks experienced a surge in popularity. According to Morningstar, the 135-strong group of U.S. dividend ETFs attracted a staggering $3.05 billion in September, a significant departure from the average monthly inflows of $424 million seen in the first eight months of 2024.
This newfound interest in dividend-yielding stocks can be attributed to investors seeking income-generating products ahead of anticipated declines in yields resulting from the Fed’s rate-cutting cycle. As Nick Kalivas, head of factor and equity ETF strategy at Invesco, noted, “The shift in monetary policy has led to a search for new investment opportunities, and dividend-paying stocks are poised to benefit.”
However, the sustainability of this trend remains uncertain. Benchmark 10-year Treasury yields have recently experienced an uptick, reaching two-month highs following a strong U.S. employment report. This suggests that the economy may not require further large rate cuts this year, potentially slowing the influx of investor funds into dividend ETFs.
Josh Strange, founder and president of Good Life Financial Advisors of NOVA, believes that the renewed interest in dividend stocks is also a response to rising valuations in sectors such as tech and broader markets. With the S&P 500’s valuation nearing its highest level in three years, investors are seeking alternative income streams.
Dividend ETFs offer yields ranging from approximately 2% to 3.6%, comparable to the 3.6% yield of benchmark 10-year Treasuries in September. These funds often feature energy and financial stocks, as well as pharmaceutical companies, utilities, and retailers. To mitigate the risk of investing in companies with deteriorating fundamentals, some ETF providers, such as Pacer ETFs, focus on building portfolios based on companies’ free cash flows.
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