Navigating Dividend Funds: A Critical Look at Industry Trends

Dividend stocks haven’t been the market’s darlings lately. High-growth tech has commanded the spotlight, often overshadowing the steadier, income-producing appeal of dividend payers. Yet, something suggests this might shift.

Lower interest rates from the Federal Reserve are coming. This action could push investors to seek yield beyond money market funds. Tom Huber at T. Rowe Price hints at this, seeing lower rates as a tailwind for dividend stocks. I’ve seen similar patterns before; when traditional income streams dry up, investors hunt for alternatives.
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US stocks, according to CFRA Research’s Aniket Ullal, also appear richly valued. For investors, fretting about inflated prices, dividend funds offer a potentially less volatile, value-focused option. Ullal suggests dividend funds as a hedge against a possible downturn in growth-heavy sectors, such as tech. Makes sense. Diversification is key, especially when the market feels a bit frothy.

Kiplinger has updated its “Dividend 15,” a list of favorite dividend-paying stocks. But a fund approach, offering instant diversification, can appeal. It raises the question: Which dividend funds warrant attention?

Some dividend funds feature in the Kiplinger 25, the list of favorite no-load mutual funds, or the Kiplinger ETF 20, highlighting top exchange-traded funds. However, other worthy contenders are around.
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Each dividend strategy has its own distinct method. Some prioritize established businesses with reliable dividends, others chase higher yields, and still others target companies boosting their payouts. A fund could mix these approaches, altering its emphasis as conditions change. International options add more variety.

Capital Group Dividend Value (CGDV), part of the Kip ETF 20, splits its assets among six managers. They independently choose high-quality US stocks with above-average yields. Chris Buchbinder notes his portfolio thrives “in upcycles and recovery environments,” whereas Jim Lovelace’s is more defensive. The fund’s strength lies in its adaptability. Its impressive three-year return beat the S&P 500, but how sustainable is this multi-manager approach during prolonged market turbulence? Top holdings are Microsoft (MSFT), Nvidia (NVDA) and RTX (RTX).

Chasing high-dividend yields boosts payouts but can intensify risk. The Fidelity High Dividend ETF (FDVV) aims to mitigate this by targeting high-yielding large and mid-sized companies while scrutinizing payout ratios and dividend growth. I appreciate the focus on quality metrics, as yield traps can be dangerous. Broadcom (AVGO), Visa (V), Philip Morris International (PM), Exxon Mobil (XOM) and JPMorgan Chase (JPM) populate the fund’s portfolio.

Dividend growth stocks – those that consistently raise dividends – usually offer lower yields. The trade-off is enhanced potential for share price appreciation because dividend-increasing companies tend to grow revenue and profit.

T. Rowe Price Dividend Growth (PRDGX), part of the Kiplinger 25, concentrates on steadily growing dividends, says Tom Huber. “Stock prices tend to track increases in a company’s earnings and dividends,” he says. However, names like Nvidia or Alphabet are absent. Huber clarifies that bending to include Nvidia, Alphabet, or Meta would just make it perform like the S&P 500 portfolio. While it lags in bull markets, it has proven more resilient during downturns, demonstrating its defensive qualities.

Vanguard Dividend Appreciation (VIG) tracks an S&P index of companies with lengthy records of dividend increases. Jeff DeMaso calls it a “solid core stock fund.” This ETF favors stable, profitable companies. While it might underperform in rapidly rising markets, it has historically held up well in bear markets, making it appealing for conservative investors. The fund’s lower loss during 2022’s market turmoil is an evidence point.

Vanguard Equity-Income Fund (VEIPX) yields above average at 2.6%. Matthew Hand, of Wellington Management, manages two-thirds of assets, focusing on “strong, stable, income-producing companies that have good quality and trade at reasonable valuations.” Vanguard’s quantitative equity group handles the remainder, identifying opportunities through models prioritizing dividends and free cash flow. Again, downside protection shines. A recent performance lag suggests a possible bias toward value versus growth.

Looking abroad, foreign stocks, even after gains, appear relatively cheap compared to US shares. Moreover, they often yield more.

The iShares International Dividend Growth ETF (IGRO) yields 3.0%, nearly triple the S&P 500. This fund emphasizes consistently rising payouts, selecting companies that have raised dividends for five years running. Royal Bank of Canada (RY), Novartis (NVS), and Roche Holding (RHHBY) are top holdings. Its allocation to emerging markets, however, is something to watch.

Janus Henderson Global Equity Income (HFQTX) targets high-quality companies with solid cash flow and earnings growth in developed foreign countries. The fund has underperformed recently, but, in five of the past seven years, it beat its peer group. British American Tobacco (BTI) and Unilever (UL) are important holdings. The fund’s distribution strategy is clever: exploit the differences in dividend payment timings to maximize income generation.

Pacer Global Cash Cows Dividend ETF (GCOW) emphasizes firms with substantial free cash flow. It targets companies with the highest free-cash-flow yield. British American Tobacco, BP (BP), and Johnson & Johnson (JNJ) are significant positions. Interestingly, US stocks represent a smaller portion of this fund compared to the MSCI ACWI index, adding a geographical diversification tilt.

Dividend funds offer diverse approaches for income-seeking investors. From yield maximization to dividend growth and geographical diversification, the options provide choices. Weighing these options carefully requires a deep dive into their strategies and risk profiles. Keep in mind past performance offers clues, but don’t expect it to repeat, as future conditions will differ. Prudent evaluation remains crucial.

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Keywords: dividend funds, dividend stocks, high dividend yield, dividend growth, international dividend funds, ETF dividend, income investing, dividend strategy