Dividend Funds Are Looking Better—Despite Higher Bond Yields

Molly Concannon, Vanguard’s head of equity products, points out that technology accounts for only 8% of Vanguard’s high dividend yield. In the past few months, “that’s been a big factor in our underperformance,” she said.

Dividend stocks are also lagging behind as bond interest rates rise. “As bond yields rise, there will be competition for high-dividend stocks,” said manager Ben Kirby.

thornburg investment income builder

(TIBAX) is a global allocation fund focused on dividend stocks. “You have another source of income.”

But today’s most favorable bond yields will be temporary. One-year Treasuries, which have the shortest maturity, have the highest yields at over 5%, while longer-term Treasuries have lower yields thanks to an inverted yield curve. In contrast, dividend stocks can pay out their yield over decades.

There are two main dividend strategies. That is high dividend yield and dividend growth. Dividend growth funds like Vanguard Dividend Appreciation invest in stocks that have increased their dividends for at least 10 consecutive years. Such dividend increases demonstrate financial strength and good corporate governance, or discipline on the part of company executives to reward shareholders with increased dividends.

As a result, in a growth-driven market like today, dividend growth funds often outperform high-yield funds because yield is not the primary performance driver. In fact, dividend growth funds often don’t offer very high yields. Vanguard Dividend Appreciation’s current yield is 1.8%.

S&P500

1.5%, Vanguard’s high dividend yield is 3.2%. Dividend growth stocks also tend to hold up even in recessions, when high-yield companies have difficulty maintaining high dividends.

That said, when stock valuations are a concern, as in 2022, high-dividend funds often win. That’s because its juicy yield appeals to income-hungry investors. When interest rates started rising from near zero in early 2022, dividend stocks held up better than bonds because bond prices are inversely proportional to interest rates. “Fixed-income investing has been hit very hard,” said David Bottsett, head of equity product management and innovation at Schwab Asset Management. “Many investors have been forced to look at alternatives, such as dividend stocks.”

Now that interest rates appear to be stabilizing, Schwab bond ETFs are seeing more new money flowing than stock ETFs, Bottsett said.Abandoning the still popular $49 billion

Schwab US Dividend Stocks

However, this may be short-sighted as the ETF (SCHD) successfully combines elements of both dividend growth and high-yield strategies while charging a low expense ratio of 0.06%, making it arguably the best dividend index fund. yeah.

ETFs incorporate a third strategy: consistent dividends. Its benchmark, the Dow Jones U.S. Dividend 100 Index, requires that the 100 stocks it covers pay dividends for 10 consecutive years, but does not require continued growth. Companies that pass this hurdle are ranked based on his four criteria: cash flow to debt, return on equity, dividend yield, and five-year dividend growth rate. Therefore, ETFs have both growth and value characteristics. Like most dividend ETFs, it has lagged recently, but its five-year annualized return of 10.4% beats 95% of its peers in the fund category. The yield is a healthy 3.6%.

Some high-dividend funds are actively managed.

T. Rowe stock dividend growth

(PRDGX) and

Vanguard dividend growth rate

(VDIGX) have both outperformed the passive Vanguard Dividend Appreciation ETF over the past 10 years.

Good managers can also find companies with both growth and high yields. Caleb Fritz, T. Rowe Price’s U.S. stock portfolio specialist, says there is a 31% stock overlap between T. Rowe Price’s dividend growth rate and dividend growth rate.

T. Rowe Price stock income

Seek high income (PRFDX). As an example, he cited chipmaker Qualcomm.

(QCOM) has been treated as a cyclical stock by the market, affected by slowing growth in the mobile phone market. The stock price has fallen 14% over the past year, and the dividend yield is 3%. But Fritz says the company has unappreciated growth potential.

Thornburg Kirby also provides growth and yield. His portfolio yields about 5%, and the fund has also been able to grow dividends per share at about 4.9% annually over 20 years, he said. Although Thornburg has lagged behind pure-play U.S. dividend ETFs in recent years due to U.S. economic growth, it has outperformed 95% of its peers in Morningstar’s Global Allocation Fund category over the past 15 years.

Mr. Kirby says overseas dividend yields tend to be high and stock prices tend to be cheap. He singled out French bank BNP Paribas (BNP.France), which has a 7% yield and a low price-to-earnings ratio of 8 times. European banks used to be poorly regulated and poorly capitalized, but that has changed. “This bank is not in any trouble,” he says. But BNP, like many dividend stocks today, trades as if it were a dividend stock. There’s an opportunity.

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