Increase in Dividend ETF Inflows

By Suzanne McGee

(Reuters) – U.S. exchange-traded funds (ETFs) focusing on dividend-paying stocks have seen substantial inflows since the Federal Reserve began its rate-cutting cycle last month. However, rising U.S. Treasury yields may temper this influx.

In September, 135 U.S. dividend ETFs monitored by Morningstar attracted $3.05 billion, coinciding with the Fed’s first interest rate cut since 2020, a reduction of 50 basis points. This contrasts with an average monthly inflow of $424 million during the first eight months of 2024.

Nick Kalivas, head of factor and equity ETF strategy at Invesco, noted that the monetary policy shift is prompting cash to seek new investment opportunities, benefiting dividend-yielding stocks.

The continuity of this trend is uncertain, as benchmark 10-year Treasury yields have risen to two-month highs recently, following strong U.S. employment data that suggests the economy remains robust, potentially reducing the need for further Fed rate cuts this year.

Josh Strange, founder and president of Good Life Financial Advisors of NOVA, indicated that renewed interest in dividend stocks stems from rising valuations in technology and broader market sectors alongside monetary policy changes.

With the S&P 500 now priced at 21.5 times future 12-month earnings estimates, it’s nearing three-year highs and is significantly above its long-term average of 15.7, according to LSEG Datastream.

Strange remarked that the S&P 500’s momentum is heavily concentrated among a few stocks, particularly in AI, leading to inflated valuations.

Dividend ETFs yield varies by strategy, from just under 2% to 3.6%. In comparison, the yield on benchmark 10-year Treasuries also fell to around 3.6% in September.

Common stocks within dividend ETFs include energy and financial firms like Chevron Corp. (NYSE:CVX), JP Morgan Chase (NYSE:JPM), and Exxon Mobil (NYSE:XOM), in addition to pharmaceutical companies such as Proctor & Gamble, utility stocks like Verizon (NYSE:VZ), Southern Co (NYSE:SO), and retailers including Home Depot (NYSE:HD).

Sean O’Hara, president of Pacer ETFs, stated that seeking higher dividend payouts involves trade-offs, necessitating investments in firms that can grow and boost those payouts. To minimize risks associated with declining company fundamentals, Pacer constructs ETF portfolios based on firms’ free cash flows, exemplified by the $24.8 billion Pacer US Cash Cows ETF launched in 2016, which has drawn $7.1 billion in inflows over the past year.