Dividends are great. they play a huge role in total return. They are a sign that a company is well managed enough, fiscally disciplined enough, to deploy cash and give it back to shareholders. They offer a way to juice yield if you’re a retiree or an endowment at a time when getting money out of bonds is like drawing blood from a turnip.

But dividends can fall prey to faddism, too—and the last months of 2013 and the early months of 2014 were proof.

After making a major comeback in the last four years after years of being black sheep, dividend stocks suffered a new cold shower in 2013, first after the Fed made its remarks about the end of quantitative easing and later after bonds saw their yields rise. The fear of imminently rising interest rates hurt all yield-bearing securities, from bonds to real estate investment trusts … and dividend funds, too.

Thus, the names in Lipper’s equity income mutual fund space saw net outflows for the first three months of 2014, and ETFs in the space saw outflows for five consecutive months from November of last year to March 2014. According to Lipper’s stats, some $2.3 billion flowed out of both dividend mutual funds and ETFs in the first quarter.

“That was pretty significant,” says Barry Fennell, a research analyst at Lipper.“Three consecutive monthly [negative] flows hasn’t happened in four years, since 2010.

“Real estate funds had a very similar pattern where they went negative the first quarter after a long stretch of positive flows,” he adds. “Now they’ve turned positive also.”

In the second quarter of 2014, poorer performance in bonds and the volatility in the stock market have lured investors back. Usually, the conservative nature of income funds and their blue-chip names—things like Pepsi, J.P. Morgan, GE and Wells Fargo—draw people when stocks are frenetic or bonds aren’t paying off, he says.

The dividends act as an anchor on volatility, says Howard Silverblatt, senior index analyst at Standard & Poor’s.

The dividend trend should continue anyway, simply because income investors have no choice, says Silverblatt. “There are not a lot of places where dividend people can go. You can’t go to bonds, you can’t go into CDs. You can’t go into REITs, which have no tax advantage.”

Jay Wong who co-manages the Payden Equity Income Fund at Payden & Rygel, says his fund briefly saw outflows last summer after the first rate warning. “People were fearful of a rate backup,” he says.

But he says earnings and GDP growth should trump rising interest rates when investors are looking at dividend fundamentals. The thing he’s afraid of is a sharp interest rate spike over a short period, which is what he says spooked investors last summer.

Almost all of the funds in the income universe at Lipper have a higher yield than the S&P 500, says Fennell, which was about 1.88% in early June. “A lot of these funds are yielding upper 2’s to 3%,” he says.

All Shook Up
The fundamentals are the same, but the names are very different. According to Fennell, the high dividend payers are now companies like Microsoft, for instance—the largest holding in the Vanguard Dividend Growth Fund, which is the second largest fund in the category at $21.1 billion. 

In the past, tech companies were disappointing misers, says Silverblatt, but their payouts, especially among chic names like Apple, are now part of their appeal. They have in essence swapped places with the financial services companies, which have become so straight-jacketed since the 2008 crisis that their payouts to investors have shrunk.

Paul Hogan, a portfolio manager with the FAM Equity-Income Fund, a strategy that focuses on companies with steady dividend growth, says that a lot of tech names have become cash rich and thus are able to pay more dividends. So his fund now has a higher tech weighting than the typical equity income fund.

“The semiconductor companies really pay nice dividends,” Hogan says. “These are really intellectual property. They outsource manufacturing and distribution. They really just need to spend money on R&D. So that leaves a lot of cash.” He points to such fund holdings as Xilinx and Microchip Technology.

“Part of it is understanding where the company is in its life cycle,” says Eric Schoenstein, a portfolio manager who seeks high-ROE investments for Jensen Investment Management in Lake Oswego, Ore. “We’ve had companies in the past that have had a fairly sustained level of growth that are still capturing a lot of opportunity and market share, in which case they haven’t gone down the path of paying a substantial dividend share because a lot of the cash flow they are producing is going back into the company at this stage.” He cites two growth companies he likes, IT services provider Cognizant Technology Solutions and medical device manufacturer Varian Medical Systems, that don’t pay dividends because they are still using capital in their growth.