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Dividend stocks have struggled of late as fast-growing tech stocks that pay little in the way of dividends have captured all the attention. But things may be about to change.
For starters, lower interest rates are on the way as the Federal Reserve continues to ease monetary policy. “On balance,” says T. Rowe Price’s Tom Huber, “lower interest rates are a net positive for dividend stocks” as investors go searching for income beyond the shrinking yields of money market funds.
What’s more, U.S. stocks are richly valued these days, says Aniket Ullal, head of ETF research and analytics at CFRA Research. Investors who worry that prices are getting a bit too high in this growth-driven market, he adds, should consider dividend fund strategies, which tend to be less volatile and more value-focused and thus are “a hedge against a potential downturn in growth-oriented sectors like technology and communications services.”
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For income investors, we recently completed our annual update of the Kiplinger Dividend 15, our favorite dividend-paying stocks. But you may prefer a fund, which offers an efficient way to build a diversified portfolio of dividend stocks across multiple sectors and industries.
To that end, we set out to find good candidates. Though a handful are members of the Kiplinger 25, our favorite no-load mutual funds, or the Kiplinger ETF 20, our favorite exchange-traded funds, we found a few others worth mentioning, too.
Each of the eight dividend strategies we highlight below have their own approach. A fund might favor steady businesses that pay stable dividends, focus on higher yields or look for companies that are hiking dividend payouts. Some funds pursue a combination of strategies or emphasize different ones at different times. We also found a few international funds to consider.
Prices, returns and other data are through September 30, unless otherwise noted.
Varying dividend strategies
At Capital Group Dividend Value (CGDV), a Kip ETF 20 member, six managers divide the fund’s assets and run their respective sleeves separately. Each must focus on high-quality U.S. stocks that pay above-average yields, but they are free to invest how they best see fit.
That can lead to distinct differences in each sleeve. Fund comanager Chris Buchbinder says his portfolio tends to do better “in upcycles and recovery environments,” for instance, while comanager Jim Lovelace’s sleeve is more defensive. “I’m almost certain that Jim would do better than I would if the market were to go down by 50%,” says Buchbinder. Part of the fund’s secret sauce comes from which of the six parts of the portfolio might be emphasized or de-emphasized, depending on the market environment.
The end result is a 52-stock portfolio with a dividend yield of 1.8%. The fund’s impressive three-year annualized return, 29.3%, beat the S&P 500. Microsoft (MSFT), Nvidia (NVDA), and global aerospace and defense company RTX (RTX) are top holdings.
A focus on high-dividend-yielding stocks means bigger payouts, but that can ratchet up the risk. The falling stock price of a troubled firm, for instance, can inflate a dividend yield. But the Fidelity High Dividend ETF (FDVV) aims to keep that risk at bay by targeting high-yielding large and midsize companies — mostly in the U.S. — while maintaining a keen eye on two quality measures: payout ratios (the percentage of a company’s earnings paid out as dividends) and year-over-year dividend growth.
That leads to a portfolio that holds a mix of growing companies with slim yields, such as Broadcom (AVGO) and Visa (V), which both yield 0.7%, as well as more stable, higher-yielding fare, such as Philip Morris International (PM, 3.8%), Exxon Mobil (XOM, 3.5%) and JPMorgan Chase (JPM, 1.9%).
All told, the ETF yields 2.8%. And over the past five years, it beat 97% of its peers (funds that invest in large, value-priced stocks). It outdid the S&P 500, too, though the fund has been a tad more volatile than the benchmark over that stretch.
The dividend trade-off
Dividend growth stocks — shares in companies that raise dividends generously year after year — typically offer less yield. But in exchange, these stocks tend to have more potential for share price appreciation. Companies that hike payouts in a big way also tend to have growing revenues and earnings.
Over time, “stock prices tend to track increases in a company’s earnings and dividends,” says Huber, manager of T. Rowe Price Dividend Growth (PRDGX), a Kiplinger 25 fund.
That said, you aren’t likely to see a high-octane company like Nvidia in this portfolio.
“We’re sticklers about dividend growth, and Nvidia pays a penny a quarter and hasn’t raised it. It doesn’t fit what we do,” says Huber. Alphabet (GOOGL) and Meta Platforms (META) aren’t in the fund either. “If we bend to own Nvidia and Alphabet and Meta, then the fund just behaves like an S&P 500 portfolio,” he says.
That explains, in part, why the fund, which yields 1.6%, has struggled relative to the index in recent years. The fund’s five-year annualized return, 12.8%, lags the benchmark’s 16.5% gain. In tough markets, however, this fund tends to hold up better. It lost just 10.2% in 2022, when the S&P 500 sank 18.1%.
Vanguard Dividend Appreciation (VIG) is an index ETF that tracks an S&P benchmark of companies with a long history of dividend increases “year in and year out,” says Jeff DeMaso, newsletter editor of The Independent Vanguard Adviser. “It’s a solid core stock fund,” he adds.
Stocks in the fund tend to be stable, profitable companies with “battleship” balance sheets. As a result, the fund tends to lag when markets are racing ahead, but it has held up better in bear markets. “It’s more of a defense-first fund,” says DeMaso, and that makes it a good fit for conservative investors.
In 2022, for instance, Vanguard Dividend Appreciation lost less than 10%, besting the S&P 500 by more than eight percentage points. Though the fund’s five-year annualized return lags the S&P 500, it is still a respectable 13.0%. The fund yields 1.7%.
The Vanguard Equity-Income Fund (VEIPX), a Kip 25 member, offers an above-average yield of 2.6%. Matthew Hand, of subadviser Wellington Management, runs two-thirds of the assets, focusing on what he calls “strong, stable, income-producing companies that have good quality and trade at reasonable valuations.” The strategy ultimately balances yield with quality, he says, and buying at sensible valuations can offer some downside protection.
Vanguard’s quantitative equity group runs the rest of the assets, using customized algorithms to find good stocks. The model emphasizes dividends and free cash flow (the money left over after operating expenses and spending to maintain or upgrade long-term assets).
The fund shines brightest when the market darkens. In 2022, for instance, when the S&P 500 lost 18.1%, Vanguard Equity-Income lost just 0.1% — ahead of 88% of its competition (funds that invest in large-company, value-priced stocks). Lately, however, the fund has underperformed the broad-market benchmark with a 14.7% return over the past 12 months, compared with a 17.6% gain in the S&P 500.
Part of the reason for the lag is that Equity-Income’s biggest holdings don’t resemble the go-go stocks that dominate the broad-market index: JPMorgan Chase, Bank of America (BAC), Gilead Sciences (GILD) and Cisco Systems (CSCO) rank among the fund’s top 10 stocks.
International dividend payers
Foreign stocks are on a roll, but they’re still cheap, relative to U.S. shares, even after a bang-up year. Better yet, they tend to offer bigger yields.
The iShares International Dividend Growth ETF (IGRO) yields 3.0%, nearly triple the yield of the S&P 500. But yield takes a backseat to consistently rising payouts at this fund. It only considers firms that have increased their dividends for at least five consecutive years, have a payout ratio of less than 75% and boast a healthy balance sheet.
That helps explain why the ETF’s 400-stock portfolio has below-average volatility that beats its peers (funds that invest in a mix of fast-growing and value-priced stocks in large, foreign companies). Top stocks include Royal Bank of Canada (RY), Novartis (NVS) and Roche Holding (RHHBY).
Firms in developed countries make up the bulk of the portfolio, but emerging-markets stocks account for 10% of the fund’s assets. Over the past five years, the fund’s 10.7% return outpaces the 10.3% gain in the MSCI ACWI ex USA index.
Kip 25 member Janus Henderson Global Equity Income (HFQTX) focuses on high-quality companies, with robust cash flow and earnings growth, in foreign developed countries. The fund has struggled in recent months, but it has outpaced its peer group (funds that invest in large, foreign companies with bargain-priced stocks) in five of the past seven full calendar years. British American Tobacco (BTI) and Unilever (UL) are top holdings.
The fund’s current yield is 4.7%, but there’s a little more to the story here. Because foreign firms tend to pay dividends once or twice a year, rather than quarterly, the managers optimize income year-round by buying a stock before it pays a dividend and selling it a few months later to buy shares in a similar firm in the same industry before it pays dividends. That’s why, over the past 12 months, the fund’s distribution yield — reflecting what has actually been paid out to shareholders — is a hefty 7.1%.
For a different take on high-quality international dividend payers, consider the Pacer Global Cash Cows Dividend ETF (GCOW). The ETF focuses on companies that are swimming in free cash flow, because, the thinking goes, these businesses are better equipped to outlast a tough market. In fact, it favors firms with the highest free-cash-flow yield (free cash flow relative to the total value of the company).
British American Tobacco, oil company BP (BP), and Johnson & Johnson (JNJ) are top holdings. U.S. stocks make up 33% of this global fund’s assets, about half of the MSCI ACWI index’s exposure to U.S. stocks. The fund’s 15.0% annualized return over the past five years beats its peer group and the MSCI ACWI index. And the fund sports a healthy, 4.9% dividend yield.
Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.
