‘Pay to wait’: playing defense with dividends
Amidst the ongoing series of seesaw trading sessions, more investors are looking for a source of continuity to counter volatility. Given the unpredictability of market behavior for the rest of the year, investors focused on greater stability may find safety in low-volatility stocks that offer dividends.
“The money has to be put to work. So, if you’re going to do it, value and dividends are a good approach,” Andrew McOrmond, managing director of Wallachbeth Capital, said in an interview on ‘ETF Edge’ on Wednesday.
McOrmond explained that for investors needing a steady influx of income, the yield from dividends is a reliable source of income regardless of treacherous market swings.
Despite analysts warning not to expect too much from dividends and buybacks, inflows into those funds have held steady in 2022. Dividend funds took in $3 billion in June and $43 billion this year, according to research from SPDR Americas.
“The overlay of quality and emphasis with value is key,” Matt Bartolini, head of SPDR Americas Research at State Street Global Advisors, told Leslie Picker in an interview on ‘ETF Edge’ on Wednesday.
Bartolini said dividend stocks have faced some near-term volatility compared to the market. Given the macro foundation as well as the fundamental foundation within these types of strategies, there is still more room for returns in dividend ETFs, he added.
“There are some companies that have consistently increased their dividends for more than 30 years,” Bartolini said. “And they’ve clearly seen some market cycles that are probably worse than where we are now.”
With the recent sharp fall in commodity prices, there has been an exodus to dividend funds. Bartolini said flows indicate a willingness to hedge and a margin of safety from equity allocation. Price has been a strong performance factor given its correlation with rates.
“Profitability has been paramount in this type of market cycle,” Bartolini said. “We’ve seen profitable stocks outperform unprofitable stocks for 12 consecutive months. And stocks that consistently pay dividends are generally profitable because they aren’t going to pay out if they are unprofitable.”
Beyond dividend stocks, bond ETFs are another haven for investors during uncertain times.
“There will always be money going into both,” McOrmond said. “You can start thinking about proactive management — whether you’re choosing a manager, or you’re doing it yourself.”
He pointed to actively managed SRLNs, where you can choose the right bind for one to perform better.
“This could be a good time for proactive management,” McCormond said. “Even if you’re choosing a dividend stock ETF, you’re just using your head. I think that’s a trend going forward in both fixed income and equities.”