Why Stock Dividend Funds Keep Growing

US News

Equity-income fund inflows hit a record last week in another sign that investors are increasingly looking to dividend-paying stocks for yield and relying less on the low payouts they get from bonds as they try to protect against volatile stock market swings. The strategy has proven its value over the past year, and some see it continuing.

"Investors use it as kind of a safety play," says Tom Roseen, Lipper's head of research. "It's been going on for a while. People were starting to put less into equity income when stocks were really rising quickly. Now they're coming back to it."

Why the shift? The "safety" component of such funds is that they represent a way to spread the risk of any single company cutting its dividend, since investors can collect yield on a wider number of stocks. Cash-rich corporations have been increasing dividends at a high rate--both ExxonMobil and Apple announced the two largest-ever payouts in history for any single company during one week in April, with Apple on top and ExxonMobil pennies behind. One factor pushing dividend increases is the growing influence of corporate activists like Carl Icahn and David Einhorn, who invest in companies and push such increases. Microsoft was the latest to be targeted for more payouts.

[See Meet the New 'White Hat' Activists: Not Just Raiders Anymore]

"It's been quite a run for dividend stocks," says Fred Dickson, chief investment strategist for D.A. Davidson & Co. "There's been some pullback recently, but the dividend stocks will probably continue in favor as long as rates stay low for bonds."

When stocks were surging, investors were moving more cash into growth stocks. But there have been regular reminders about how volatile the market can be. Wall Street had its worst day since last November on April 15, with a decline of more than 2 percent. Just a week later, the market plunged on a Twitter-feed hoax claiming a bombing had taken place at the White House. It triggered a 145-point fall in the Dow industrials.

A way to prepare for rate hikes. Investors are also buying equity-income funds as a way to prepare for rising interest rates in anticipation that the Federal Reserve may let rates rise in the next year or two. That would cause bond prices, which are inverse to yields, to plummet. Stock dividends are better bets in that scenario because they can be increased, says Roseen.

Dickson says the potential for gains in individual stocks that pay dividends adds to the attraction. A diversified fund doesn't have as much potential for pure returns unaided by payouts. But even if markets underperform, for dividend investors, "what happens with the Dow does not really happen as long as you get your dividend," he says.

[Dividend Drama: Will Your Company Increase, Cut or Stay Put When Earnings Are Announced?]

Dickson also notes that there has been a big shift in how investors view the role of dividend stocks and their function in the income component of a diversified portfolio. That could mean stocks might be a larger portion of some portfolios, even among retirees. For example, if a retired person is 40 percent in equity and 60 percent in bonds, it's prudent to shift one-third of that income into equity dividends, he says. That would put the overall equity portion at 60 percent stocks when the income is shifted from bonds to dividend stocks or funds.

Record week comes with an asterisk, but is still a clear sign of demand. Equity-income funds experienced inflows in 40 of the past 52 weeks, according to Lipper. Still, a big piece of the record $1.44 billion jump in equity income is from one major fund family, Federated Capital Appreciation Fund, which merged assets into the Federated Equity Income Fund. That accounted for $834 million of the increase in equity-income totals. But Roseen says it was more than simply a "reclassification" because it showed investors' demand for equity income. "They are focusing their effort on a winning category," he says.

In stock trading, sectors that pay relatively high dividends are outperforming the Standard & Poor's 500 index as investors pursue them for their mix of income and capital appreciation. Telecoms and cable companies have been strong over the past year among investors seeking both. Verizon and Comcast have been among the favorites, with both showing gains of over 30 percent in value over the past year, more than twice the growth of the S&P 500. Verizon's dividend yield is 3.9 percent and Comcast's is 1.9 percent.

[See 10 'Digital Utilities' That Could Pay You Dividends]

For those who want to invest in funds, Dickson says there are a number that track the 50 highest-yielding constituents of the S&P Composite 1500 index that have increased dividends every year for at least 25 consecutive years. One of them, the SPDR S&P Dividend ETF, has a total return of 14 percent so far this year and a 52-week return of 20 percent. Its three-year average return is 13.9 percent. Consumer-staple companies like Johnson & Johnson and Kimberly Clark are among the components.

"Those companies are managed in a way that assures steady cash flow and earnings year after year, and they focus on ways to increase the dividend," Dickson says. "That's not a bad way to manage any company. It means they pay a dividend regularly, and usually it means that not only will they go up in value but the stock's value will rise, too."



More From US News & World Report

Rates

View Comments (0)

Recommended for You

  • Tycoon buys 30 Rolls-Royces for Macau hotel

    A Hong Kong tycoon has placed the biggest ever order for Rolls-Royce cars, agreeing to buy 30 Phantoms to chauffeur guests at a luxury resort he's building in the global gambling capital of Macau. Stephen Hung's $20 million purchase surpasses the 14 Phantoms bought by Hong Kong's Peninsula Hotel in…

    Associated Press
  • 1 Tip To Lose Belly Fat

    It's Hollywood's Hottest Diet And Gets Rid Of Stubborn Fat Areas Like Nothing Else.

    AdChoicesagoodcooksSponsored
  • Before You Buy Alibaba, Check Out 4 Top China Stocks

    Before You Buy Alibaba, Check Out 4 Top China Stocks While investors gear up for Alibaba Group 's (BABA) hotly anticipated initial public offering, don't forget about other Chinese stocks that are worth keeping an eye on. Today's Young Guns Screen of

    Investor's Business Daily
  • CNBC Anchor Calls Out Fed-Hater Bill Fleckenstein In Startling Shouting Match

    CNBC Bill Fleckenstein of Fleckenstein Capital appeared on CNBC's Futures Now program on Tuesday. Futures Now host Jackie DeAngelis came out swinging, asking Fleckenstein right at the top if he was willing to admit that he had misunderstood monetary policy. Sounding taken aback, Fleckenstein…

    Business Insider
  • "The Retiree Next Door": How successful retirees stretch their savings

    "The Retiree Next Door": How successful retirees stretch their savingsBy the time she hit her late 40s, Toni Eugenia wasn’t sure she would ever be able to retire. Eugenia, 56, a pharmacy technician who lived in Houston, was nearly $200,000 in debt and

    Yahoo Finance
  • Play

    Citi, Bank of America Offer Discounted Mortgages

    Citigroup and Bank of America will offer mortgages at discounted interest rates to help borrowers with low incomes or subprime credit. AnnaMaria Andriotis joins MoneyBeat. Photo: Getty.

    WSJ Live
  • As Fed takes baby steps, Cramer's trick for profit

    In turn, Cramer says making money in the market, involves looking at the environment through the lens of the Fed. "The trick is to remember that they speak for the common person," Cramer said. "The Fed wants the common person to make money." With that backdrop always in mind, Cramer says it becomes…

    CNBC
  • Beanie Babies creator's sentence debated in court

    Beanie Babies creator's sentence debated in court CHICAGO (AP) — Federal prosecutors seeking to put the billionaire creator of Beanie Babies in prison for hiding millions in Swiss bank accounts told appellate court judges Wednesday that the toymaker's sentence of probation threatens to erode the…

    Associated Press
  • Tired of Living Paycheck to Paycheck?

    New website reveals how to save $1,000's when you're living paycheck to paycheck. See exactly how.

    AdChoices Media ForceSponsored
  • Apple to unveil new iPads, operating system on Oct. 21 : report

    The company plans to unveil the sixth generation of its iPad and the third edition of the iPad mini, as well as its operating system OS X Yosemite, which has undergone a complete visual overhaul, the Internet news website said. Trudy Muller, a spokeswoman for Apple, declined to comment. The iPad is…

    Reuters
  • Margaritaville casino owners seek bankruptcy

    The owner of Biloxi's Margaritaville casino has filed for Chapter 11 bankruptcy protection Tuesday, only hours before a hearing where the landlord aimed to seize the property. The filing by MVB Holding LLC in U.S. Don Dornan, a lawyer for landlord Clay Point LLC, said the company had planned to ask…

    Associated Press
  • Embraer to sell 50 E-175 jets to Republic in $2.1 billion deal

    Brazil's Embraer SA, the world's third largest commercial planemaker, said on Wednesday it booked a firm order from U.S. The deal, which will be included in Embraer's order book for the third quarter, is valued at $2.1 billion, the planemaker said in a securities filing. The planes will be operated…

    Reuters
  • Gilead Stock Is Falling On These Drug Setbacks

    Gilead Stock Is Falling On These Drug Setbacks Gilead Sciences (GILD) shares are backsliding Wednesday on news that the patient drop-out rate for hepatitis C drug Sovaldi is quadruple that of clinical trials. In addition, the biotech's Phase 2 study results

    Investor's Business Daily
  • Here's What Mark Cuban Wishes He Knew About Money In His 20s

    Cuban is the owner of the Dallas Mavericks basketball team. Billionaire investor and entrepreneur Mark Cuban is generous with his advice. When we asked him what he wishes he'd known about money in his 20s, he said:

    Business Insider
  • SHOE COMPANY: Our CEO Just Disappeared And Most Of The Money Is Gone

    "and like that: he's gone." This is an actual headline from a company press release: "CEO and COO disappeared, most of the company's cash missing." (Via FastFT) In a statement, German-based shoe company Ultrasonic said its CFO,  Chi Kwong Clifford Chan, has been unable to reach the company's CEO,…

    Business Insider
  • Best Womens Wrinkle Creams 2014

    Mom reveals simple wrinkle solution that has researchers very excited. Try this free solution today to look and feel years younger.

    AdChoicesBellaLabs.comSponsored
  • Billionaire Investor Says Chinese People Work Harder And Western Companies Could Face Deep Trouble After Alibaba IPO

    Michael Moritz, the chairman of VC firm Sequoia Capital, is a huge fan of Chinese internet companies and reiterated his enthusiasm for the Chinese market in an interview with The Wall Street Journal Wednesday. The billionaire investor described the Alibaba IPO as a “major landmark event” that is as…

    Business Insider
  • Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More

    Top Analyst Upgrades and Downgrades: AEP, BHP, GE, Incyte, 3M, Tyco, Under Armour and More Stocks were firm on Wednesday morning ahead of the FOMC meeting outcome. Tuesday’s rally may have sparked higher interest again, and investors are looking for bargains

    24/7 Wall St.
  • Play

    What the Fed Meeting Means for Bonds

    Janet Yellen & Co. are expected to hint at their timetable for raising interest rates. Here's how investors should prepare ahead of the meeting.

    WSJ Live
  • Romney-Sized IRAs Scrutinized as Government Studies Taxes

    The preliminary report attaches data to an issue that drew attention during the 2012 presidential campaign, when Republican nominee Mitt Romney reported an IRA worth $20 million to $102 million. Senate Finance Committee Chairman Ron Wyden said many of these "massive" accounts come from deals…

    Bloomberg
  • Boeing may have outfoxed Musk, but it could have bigger problems

    Elon Musk is arguably one of the greatest entrepreneurial minds of the 21st Century, but he was outsized an old school aerospace giant. Boeing won the bulk of NASA’s contract for a space taxi.  One of the other companies vying for the deal is SpaceX, the company headed by Tesla’s Musk, will get a…

    Talking Numbers
  • 6 Things Debt Collectors Wish You Knew

    The work debt collectors do is not popular, and has become increasingly derided by those who don’t like what we do or simply don’t know the facts about debt collection. Too often, debt collection is painted with a broad brush to create a portrait that isn’t accurate, and doesn’t properly educate…

    Credit.com
  • Masters in Accounting or Forensic Accounting

    Study online in your spare time and graduate in less than two years. Accredited program from New England College School of Accounting.

    AdChoicesNew England CollegeSponsored
  • Play

    Tues., Sept. 16: Watch Humana Stock

    Humana, Global X Social Media Index ETF and Majesco Entertainment are among stocks to watch. WSJ's Chris Dieterich discusses the details with Michael Casey. Photo: Humana

    WSJ Live