Washington (Business Emerge), October 10: U.S. exchange-traded funds (ETFs) focused on dividend-paying stocks have seen a significant surge in inflows since the Federal Reserve began reducing interest rates last month. However, increasing U.S. Treasury yields could potentially slow down the wave of investor funds.
In September, the 135 U.S. dividend ETFs tracked by Morningstar attracted $3.05 billion, coinciding with the Federal Reserve’s 50 basis point interest rate cut—the first such reduction since 2020. This figure stands in stark contrast to the average monthly inflows of $424 million seen during the first eight months of 2024.
“The shift in monetary policy means cash is seeking new destinations, and dividend-yielding stocks are among the key beneficiaries,” said Nick Kalivas, head of factor and equity ETF strategy at Invesco.
Whether this trend will endure remains uncertain. Recently, 10-year Treasury yields have climbed to two-month highs, driven by a strong U.S. employment report that suggests the economy may not require additional significant cuts from the Fed this year.
Despite this, the growing interest in dividend stocks is also fueled by rising valuations in sectors like technology, said Josh Strange, founder and president of Good Life Financial Advisors of NOVA. Additionally, broader market shifts and monetary policy adjustments have contributed to this renewed focus.
The S&P 500, valued at 21.5 times its future 12-month earnings estimates, is now at its highest point in three years—substantially above the long-term average of 15.7, as per LSEG Datastream.
“The S&P 500’s momentum has concentrated around a few names, particularly in AI, making these stocks appear overvalued,” Strange explained.
Dividend ETFs offer varied yields based on strategy, generally ranging from just under 2% to as high as 3.6%. In contrast, the yield on 10-year Treasuries fell to approximately 3.6% in September.
Common holdings in dividend ETFs include energy and financial stocks like Chevron Corp., JP Morgan Chase, and Exxon Mobil. Additionally, these ETFs often feature pharmaceutical giants such as Procter & Gamble, utility companies like Verizon and Southern Co., as well as retailers like Home Depot.