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A Bird in the Hand is Worth Two in the Bush

20 March 2023

 

In unsettled markets, consider dividend ETFs

One strange thing about this uncertain time is how little it seems to have changed people’s investing habits. With inflation high and the possibility of recession mounting, you would expect to see investors increasing their holdings in shares paying out high dividends.

After all, it’s at times like these that companies with high dividends come into their own. When interest rates are low and the future looks exceptionally bright, it’s difficult to match the returns of more speculative stocks in sectors like technology. But when the cycle turns, the solid reliability of a company paying out high dividends is hard to beat.

Quite simply, a bird in the hand is worth two in the bush. Strong companies normally tend to carry on paying their dividends to shareholders, even while stock markets are volatile. Indeed, companies paying out high levels of dividends have a record of even increasing their dividends in line with inflation.

Overlooked Resilience

Not everyone realises the power of dividends. During the past few years they have been overlooked, as many investors might have preferred to buy flats in Berlin or Warsaw for income, or technology stocks for capital growth. But a bit of historical perspective shows the value of dividends. In fact, over the 90 years since 1930, they have accounted for about 40% of the annual total return in the U.S. S&P 500 index.1

Breakdown of S&P 500 Index Annualized Returns (%) 1930 - Present
  Return
Price Appreciation 5.74
Dividends 4.02
Annualized Total Return 9.76

Source: Morningstar.

What’s more, dividends have tended to perform better than the rest of the stock market at times of high inflation and volatility. During the 1940s, 1970s and 1980s, when inflation averaged 5% or higher, dividends provided an average of 54% of the S&P 500’s total return2. And the predictability of dividend income has meant that stocks paying out high dividend yields have tended to fall less in unsettled markets. With historical examples looking appealing, one should not forget that investing in equities involves risk. Please see the fund documentation before investing.

Dividends Are Key in Periods of Muted Returns

Dividend Contribution to S&P 500 Total Return / 1/1/1930 - 31/12/2022

Dividends Are Key in Periods of Muted Returns

Source: Morningstar.

As we mentioned in an article three years ago, the fundamentals of high dividend strategies were favourable then, and they are even more so today. At the current time, investors can take comfort from the fact that companies in the U.S. at least have high levels of cash, which gives them the capacity to sustain dividend pay-outs if their earnings fall. Indeed, cash levels rose to the highest levels for several decades during the Covid-19 pandemic and remain at elevated levels.3 Despite this dry powder, dividend pay-out ratios are below historical averages, providing the leeway not just to maintain but to increase dividends.

Avoiding Dividend Traps

Yet high dividend yields can mean high risks. A stock can lure an investor with a high yield, only for the company behind it to cut the dividend due to financial distress, leaving the investor nursing a loss.

That’s why our VanEck Morningstar Developed Markets Dividend Leaders ETF screens the 100 high-dividend stocks it invests in for their resilience. The ETF selects only conservative stocks where dividend payments account for less than 75% of the company’s earnings. With an income yield of 4.6%, this is one of the highest yielding dividend ETFs at the moment in Europe. It’s also one of the best performing dividend ETFs over the past year.4

1 Source: Morningstar.

2 Source: Morningstar.

3 Source: Bloomberg. VanEck analysis.

4 Source: JustETF. Year to 10 March 2023. Past performance is not guarantee of future results.

Important Disclosures

For informational and advertising purposes only.

VanEck Asset Management B.V., the management company of VanEck Morningstar Developed Markets Dividend Leaders UCITS ETF (the "ETF"), a sub-fund of VanEck ETFs N.V., is a UCITS management company incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). The ETF is registered with the AFM and tracks an equity index. The value of the ETF’s assets may fluctuate heavily as a result of the investment strategy. If the underlying index falls in value, the ETF will also lose value.

Investors must read the sales prospectus and key investor information before investing in a fund. These are available in English and the KIDs in certain other languages as applicable and can be obtained free of charge at www.vaneck.com, from the Management Company or from the following local information agents:

Austria: Facility Agent: Erste Bank der oesterreichischen Sparkassen AG

Germany: Facility Agent -- VanEck (Europe) GmbH

Spain: Designated Distributor -- Allfunds Bank S.A.

Sweden: Paying Agent – Skandinaviska Enskilda Banken AB (publ)

Portugal: Paying Agent -- BEST – Banco Eletrónico de Serviço Total, S.A.

Luxembourg: Facility Agent -- VanEck (Europe) GmbH

The S&P 500 Index (“Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2020 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC’s indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein.

Important Disclosure

This is a marketing communication. Please refer to the prospectus of the UCITS and to the KID before making any final investment decisions.

This information originates from VanEck (Europe) GmbH, which has been appointed as distributor of VanEck products in Europe by the Management Company VanEck Asset Management B.V., incorporated under Dutch law and registered with the Dutch Authority for the Financial Markets (AFM). VanEck (Europe) GmbH with registered address at Kreuznacher Str. 30, 60486 Frankfurt, Germany, is a financial services provider regulated by the Federal Financial Supervisory Authority in Germany (BaFin).

The information is intended only to provide general and preliminary information to investors and shall not be construed as investment, legal or tax advice VanEck (Europe) GmbH, VanEck Switzerland AG, VanEck Securities UK Limited and their associated and affiliated companies (together “VanEck”) assume no liability with regards to any investment, divestment or retention decision taken by the investor on the basis of this information. The views and opinions expressed are those of the author(s) but not necessarily those of VanEck. Opinions are current as of the publication date and are subject to change with market conditions. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results. Information provided by third party sources is believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. Brokerage or transaction fees may apply.

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