US dividend ETFs gain investor attention after jumbo Fed rate cut

By Suzanne McGee

(Reuters) – U.S. exchange-traded funds (ETFs), which invest in dividend-paying stocks, have enjoyed large inflows since the Federal Reserve began its rate-cutting cycle last month, although a jump in U.S. Treasury yields could slow the deluge. Investor funds.

The group of 135 U.S. dividend ETFs tracked by Morningstar pulled in $3.05 billion in September, the same month the Fed cut interest rates by 50 basis points, the first cut since 2020. That compares to an average monthly flow of $424 million in the first eight months of 2024.

Their new popularity has been driven by investors seeking income-producing products before yields fall as the Fed continues to cut interest rates.

“The core of monetary policy translates into cash seeking new homes, and dividend-yielding stocks will be among the beneficiaries,” said Nick Kalivas, head of factor and equity ETF strategy at Invesco.

Whether the trend continues remains to be seen: The benchmark 10-year Treasury yield has moved higher in recent weeks and hit a two-month high on Friday, after U.S. jobs numbers pointed to a resilient economy that likely doesn't need the Fed to deliver bigger cuts this year. .

Still, Josh Strange, founder and president of NOVA's Good Life Financial Advisors, says the resurgence of interest in dividend stocks is a response to changes in monetary policy as well as technology as well as valuation increases in the broader market.

At 21.5 times forward 12-month earnings estimates, the S&P 500's valuation is near its highest level in three years and well above its long-term average of 15.7, according to LSEG DataStream.

“The S&P 500 is increasingly concentrated in just a few names, and the momentum is all centered around AI, making these stocks look frothy,” Strange said.

Dividends vary according to the yield strategy offered by the ETF, but can range from just 2% to 3.6%. By comparison, the benchmark 10-year Treasury yield fell to around 3.6% in September.

Energy and financial stocks often appear in dividend ETFs, including Chevron Corporation, JPMorgan Chase and Exxon Mobil. But they also feature pharmaceutical companies like Procter & Gamble, utilities like Verizon (VZ.N> or Southern Co.) and retailers like Home Depot.

“If you're looking for high dividend payouts, you're making a tradeoff: You want to own companies that are going to grow and be able to grow those payouts,” Sean O'Hara, president of Pacer ETFs, told Inside ETFs, discussing the dividend outlook. ETFs and related products in its latest version.

To reduce the risk of owning companies with deteriorating fundamentals, Pacer builds ETF portfolios based on the company's free cash flow, such as the $24.8 billion Pacer US Cash Cows ETF, launched in 2016. It has attracted inflows of $7.1 billion over the past 12 months .

(Reporting by Suzanne McGee; Editing by Ira Iosebashvili and Deepa Babington)