Investors like to think of S&P 500 dividends as money in the bank. But the opposite is true this year — dividend stocks and ETFs that own them are costing you money.
All 10 of the largest dividend ETFs, including Vanguard Dividend Appreciation (VIG), Vanguard High Dividend Yield ETF (VYM) and SPDR S&P Dividend ETF (SDY), are down in 2020 so far, says an Investor’s Business Daily analysis of data from S&P Global Market Intelligence and MarketSmith.
Investors lost money on all 10 of these dividend ETFs, even if you add back the full-year dividend yield coming into the year.
Some of the losses are head-turning. The nearly $13 billion-in-assets iShares Select Dividend ETF (DVY), which owns 100 dividend paying stocks, is down 24% this year. That leaves investors 21% in the hole, even if you add in the 3.1% yield at the start of the year.
Meanwhile, growth stocks, many that don’t pay a dividend, keep pulling ahead. The Vanguard Growth ETF (VUG) yields just 0.8%, but who cares when the stock is up nearly 17% this year? Even the SPDR S&P 500 ETF Trust (SPY) 1.7% yield is enough to erase its 1.3% price drop this year.
“Safer has meant suckier for a number of years,” said Michael Farr, president of money manager Farr Miller & Washington. “Growth stocks don’t usually pay dividends.”
S&P 500 Dividends Keep Shrinking
There’s another risk to S&P 500 dividends and ETFs that invest in them, says Todd Rosenbluth, head of ETF and mutual fund research. Companies keep slashing these payments.
“More than one in 10 S&P 500” companies cut or froze their dividend in the first half of 2020, Rosenbluth says. All 11 S&P 500 sectors saw companies cut dividends. And most of the dividend cuts appeared in the consumer discretionary and energy sectors.
All 10 of the highest yielding S&P 500 stocks at the start of the year have dropped in price this year. Occidental Petroleum (OXY), for instance, yielded 7.7% in January. Shares lost more than half their value in 2020.
And real estate play Iron Mountain yielded 7.8% in January, more than any S&P 500 stocks. Shares are down 14% this year. “Great dividends are a warning sign and typically don’t last,” Farr said.
Dividend ETFs Investors Learning The Hard Way
The rush into dividend-producing ETFs is reversing direction. Investors yanked $3.3 billion out of dividend and fundamental focused ETFs this year through June, Rosenbluth says. Meanwhile, more than $33 billion poured into U.S. stock ETFs.
“Concerns about dividend cuts and suspensions were likely top of mind,” he said.
Exposure to sectors cutting dividends the most is less of a risk in some ETFs, Rosenbluth says. The $5.5 billion-in-assets ProShares S&P 500 Dividend Aristocrats ETF (NOBL) owns only large companies with a long-term record of boosting dividends.
As a result, it puts nearly 30% of its portfolio in industrials and just 10% in consumer discretionary, Rosenbluth says. Meanwhile, WisdomTree U.S. Quality Dividend Growth ETF (DGRW) puts 26% in technology. A rising number of tech leaders are paying dividends. You can find some of them on Leaderboard.
SPY stock, on the other hand, puts just 8% in industrials and 11% in consumer discretionary.
In the past, market volatility might scare investors into buying safe stocks, Farr says. Now, it “brings the Fed running,” he said, “so there’s not much need to play defense.”
Farr also worries about high dividend ETFs that might own real estate stocks. Many REITs could struggle to maintain payouts with economic growth falling. The Vanguard Real Estate ETF (VNQ) is down more than 15% this year, overwhelming its 4.6% yield.
“You still need to know what you own even when buying ETFs,” Farr said. “Never place blind faith in an investment you don’t understand.”
Dividend ETFs Are Struggling Again This Year
All the largest dividends, by assets, are down in price in 2020 so far
|Company||Symbol||Assets ($ Billions)||Dividend Yield On Jan. 1, 2020||Stock YTD % Ch.|
|Vanguard Dividend Appreciation||(VIG)||$43.0||1.7%||-4.4%|
|Vanguard High Dividend Yield||(VYM)||25.6||3.0%||-15.6%|
|SPDR S&P Dividend||(SDY)||15.0||2.5%||-16.2%|
|iShares Select Dividend||(DVY)||12.6||3.1%||-24.3%|
|Schwab U.S. Dividend Equity||(SCHD)||11.1||3.0%||-11.1%|
|iShares Core Dividend Growth||(DGRO)||10.7||2.2%||-9.7%|
|First Trust Value Line Dividend Index Fund||(FVD)||8.6||2.0%||-15.7%|
|ProShares S&P 500 Dividend Aristocrats||(NOBL)||5.8||1.9%||-10.2%|
|iShares Core High Dividend||(HDV)||5.5||3.3%||-17.5%|
|WisdomTree U.S. Quality Dividend Growth||(DGRW)||3.5||2.2%||-4.8%|
|SPDR S&P 500 ETF Trust||SPY||1.7%||-1.3%|
View more information: https://www.investors.com/etfs-and-funds/etfs/sp500-investors-lost-fifth-money-dividend-stock-yielding/