With markets in tumult and inflation surging, the allure of high-dividend stocks is growing fast.
Exchange-traded funds that track the highest-yielding stocks have taken in about $25 billion in assets so far this year, a new record for the value-oriented category, and inflows could reach $50 billion by year-end, according to Bloomberg Intelligence senior ETF analyst Eric Balchunas.
Companies that pay big dividends to their holders have long been wallflowers compared to sexier tech stocks, but that’s changing as the Federal Reserve rapidly hikes interest rates, raising fears of a recession, sending growth stocks spiraling and causing bond prices to slump.
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“Investors have a need for yield, yet people are skittish to get that yield in the bond market because they know the Federal Reserve is hell-bent on raising rates,” Balchunas said on Bloomberg’s “Trillions” podcast. “With these ETFs, you’ve got this perfect one-two punch where they have two things people want right now — exposure to energy and high dividends.”
Energy companies often have high dividend yields, and the sector is the only portion of the S&P 500 Index that’s in the green this year as the war in Ukraine has crimped supplies, with the sector rising 29% as of Friday’s close versus a decline of 18% for the broader benchmark. Meanwhile, dividend-paying stocks have outperformed every other factor except value year-to-date, according to data compiled by Bloomberg.
Some of the high-dividend ETFs have energy stakes approaching 20%, helping boost their performance. Exxon Mobil Corp., which yields just over 4% and whose stock is up 42% this year, is a top holding in many funds. These include the WisdomTree US High Dividend Fund and the iShares Core High Dividend ETF, both of which have total returns of about 2% so far this year.