Dividend stocks have been attracting investors for several years because of low yields on fixed-income instruments. Now their appeal is broadening as investors assume defensive postures, accelerating dividend-paying vehicles into outperformance.
Dividend payouts provide a downside price cushion, the theory goes, though of course the threat of dividend cuts could exacerbate any decline. But a repeat of that debacle is unlikely, at least this year.
Another characteristic of dividend stocks is that they tend to belong to more mature, more established companies that are big enough to weather temporary turbulence. This latest round of investor concern about the pace and strength of global economic recovery has taken growth and small stocks out of favor.
Through May 23, the broad stock market (as measured by the Dow Jones U.S. Total Stock Market Index) is up 2.63% this year. Since Feb. 28, however, the market has advanced just 1.33%, and as recently as May 15 was down 0.6%. By contrast, most of the dividend-focused ETFs with the most assets are all showing gains that are solid if not awesome.
These ETFs — iShares Select Dividend (DVY) , iShares High Dividend (HDV) , SPDR S&P Dividend ((SDY) , Vanguard Dividend Appreciation(VIG) and Vanguard High Dividend Yield (VYM) collectively invest $53 billion in stocks of various dividend indexes. Here is how they have performed so far this year:
Year to 5/23
Even the least among these is offering shelter from the market’s vicissitudes. Of course, wise investors look beyond performance to assess other attributes. One of these is “beta” — how a particular security fluctuates relative to the market (again, the Dow Jones U.S. Total Stock Market Index), which is given a value of 1.0. The results are from the 12 months ended May 23:
All these ETFs are less volatile than the market. That adds “haven” to performance in the plus column.
Of course, yields are important for dividend investments. On this score, all but one of the five ETFs surpass our benchmark’s 1.92% yield:
The only entry in the minus column is that these ETFs seem to be more or less fully priced relative to the broad market, which carries an April 30 P/E ratio of 17.86:
So, these ETFs are not value plays with a valuation catch-up as part of their allure. But their performance, muted volatility and, for the most part, attractive yields suggest that they can dial down the angst that many investors are feeling. That’s worth considering, especially if the alternative is dropping out of the market altogether and possibly missing out on the next rally.
John Prestbo is retired as editor and executive director of Dow Jones Indexes, now part of S&P Dow Jones Indices, in which Dow Jones & Co., publisher of MarketWatch, holds a small interest. Mr. Prestbo also is an adviser to MarketGrader Capital, which scores stocks on the basis of fundamental factors and chooses components of the Barron’s 400 Index.
More from MarketWatch:
One in 4 Americans saves nothing for retirement
Investing in a hedge fund isn't worth the effort
Investors exit stocks for cash and bonds
More From MarketWatch
- Why stocks are being held back from a big breakout
- Euroskeptics advance, yet practical results limited
- Facebook sues college grad emulating 'Wolf of Wall Street'
- Investment & Company Information
- stock market