Dividends used to calm the nerves of investors rattled by the S&P 500. But dividend ETFs aren't working anymore.
Six of the 15 worst-performing diversified ETFs this year focus on dividend stocks, including Invesco S&P Ultra Dividend Revenue ETF, Global X SuperDividend US ETF and SPDR Portfolio S&P 500 High Dividend ETF, says Morningstar Direct. Seeing dividend ETFs, known for their safety during turbulent times, struggling is a surprise as many performed well coming out of 2020.
"The move we've seen this year is a bit of a reversal," said Jack Ablin, chief investment officer at Cresset Capital Management. "The hardest hit names and sectors last year are the best performers this year. Dividends were a valuable attribute in 2022. Not so much nowadays."
What's Ailing Dividend ETFs?
Numbers show the reversal. The 12 poorest performing dividend ETFs this year gained an average of 12.6% since 2020, topping the S&P 500's 8.2% gain in that time. And that doesn't even include their average 3.8% dividend yield, which easily tops the 1.5% paid by the S&P 500.
But it's a different story this year so far. They're down an average of nearly 6%, lagging the S&P 500's nearly 6% rise.
Why the shift away from dividend stocks? Three words explain part of it: higher interest rates. When you can get 4% on "risk free" Treasurys or even a high-yield savings account, why bother with the risk of dividend stocks?
Additionally, there's a powerful shift away from value stocks that tend to pay lofty dividends to growth stocks. Just a handful of giant growth stocks are driving a vast majority of this year's stock market gains. And that's not to mention the rush out of bank stocks, many of which are high yielders.
"There has been a shift in 2023 toward growth over value stocks with technology, communication services and consumer discretionary securities outperforming more defensive higher yielding sectors," said Todd Rosenbluth, director of research of VettaFi. "In addition, with short-term Treasurys offering 4% yields the high dividend strategies are providing less of a boost."
Digging Into Dividends
A look inside the nearly $47 billion-in-assets Schwab U.S. Dividend Equity ETF reveals what's dogging dividend stocks.
The ETF is down 6.5% just this year, which more than erases its 3.6% dividend yield for the entire year. Just this year, the ETF ranks as the thirteenth worst-performing diversified ETF.
The 100 holdings in the ETF show what's going on. Three of the holdings in the ETF, including financials Zions Bancorporation, Heritage Financial and CVB Financial are all down 40% or more his year. That shreds up these stocks' seemingly powerful dividends of 5% to 6%. The entire banking sector, especially smaller and regional banks, are under pressure. The failure of Silicon Valley Bank earlier in the year prompted some depositors to move their money into Treasurys or into larger banks.
Another strong sector for dividends, health care, hasn't panned out all that well this year, either. Shares of Pfizer, which just years ago was celebrating the successful launch of its Covid-fighting vaccine, is down more than 24% this year. And its lucrative 4.2% dividend yield isn't doing much to lure buyers.
Dodging The Dividend Bullet
That's not to say all dividend stocks are doing so poorly. But the exceptions aren't necessarily household names.
Take homebuilder M.D.C. Holdings. It's one of the better-performing members of the Schwab U.S. Dividend Equity ETF, gaining more than 20%. It also yields 5.1%, too. The company's profit is expected to plunge 66% in 2023. But it's 2024 that investors are looking forward to, as earnings are to jump more than 30%.
And similarly, while dividends are out for now, it wouldn't take much to make them attractive again.
Dividend ETFs Struggle This Year
| ETF | Symbol | YTD % ch. | Yield | Assets ($ billions) |
|---|---|---|---|---|
| Invesco S&P Ultra Dividend Revenue | -9.4% | 3.9% | $0.9 | |
| Global X SuperDividend U.S. | -9.5% | 7.2% | 0.6 | |
| SPDR Portfolio S&P 500 High Dividend | -6.3% | 4.5% | 6.8 | |
| Invesco High Yield Equity Dividend Achievers | -6.3% | 4.4% | 1.4 | |
| Schwab U.S. Dividend Equity | -5.9% | 3.6% | 46.9 | |
| WisdomTree U.S. High Dividend Fund | -5.9% | 4.2% | 1.3 | |
| Invesco S&P 500 High Dividend Low Volatility | -5.8% | 3.7% | 3.6 | |
| WisdomTree U.S. SmallCap Dividend Fund | -4.7% | 3.1% | 1.8 | |
| iShares Select Dividend | -4.6% | 3.2% | 21.3 | |
| ProShares S&P Midcap 400 Dividend Aristocrats | -4.5% | 2.4% | 1.6 | |
| Cambria Shareholder Yield | -4.3% | 2.9% | 0.7 | |
| WisdomTree U.S. MidCap Dividend Fund | -3.4% | 3.0% | 3.2 |
Source: Morningstar, IBD, S&P Global Market Intelligence
Follow Matt Krantz on Twitter @mattkrantz
