Dividend Funds: A Promising Alternative as Bond Yields Surge

As bond yields continue to climb, investors seeking regular income are turning to dividend funds as a promising alternative. With the 10-year Treasury note’s yield approaching 5% for the first time since July 2007, Morningstar has upgraded the process ratings on four dividend exchange-traded funds (ETFs), providing income hunters with valuable insights for selecting investments.

Bryan Armour, Director of Passive Strategies Research for North America at Morningstar Research Services, highlights the potential risks of being heavily invested in bonds during this period of rising interest rates and potential inflation. He suggests that diversifying income sources, particularly by incorporating stock exposure, historically leads to better long-term total returns compared to bonds.

Among the top-rated dividend ETFs are the Schwab U.S. Dividend Equity ETF (SCHD), Vanguard High Dividend Yield ETF (VYM), Vanguard Dividend Appreciation ETF (VIG), and Vanguard International Dividend Appreciation ETF (VIGI). These ETFs are considered “best in class” by Morningstar, not only for their ability to identify different types of dividend companies but also for their strong equity portfolios.

The Schwab U.S. Dividend Equity ETF, for instance, boasts a 12-month dividend yield of 3.7%. This strategy focuses on companies with a long track record of paying dividends and solid yield expectations, evaluating them based on various quality metrics. With a well-balanced portfolio across different sectors, including top holdings such as Amgen, Broadcom, AbbVie, Chevron, and Merck & Co, this ETF has consistently delivered impressive annualized returns of 10.79% over the past decade, outperforming its peers.

Similarly, the Vanguard High Dividend Yield ETF offers a 12-month dividend yield of 3.25%. By selecting the higher-yielding half of eligible dividend-paying stocks among U.S. large- and mid-cap stocks, this ETF leverages the market’s pricing dynamics. Its market-cap weighting strategy favors larger, more stable stocks, minimizing the impact of any potential value traps. With total annualized returns of 9% over the past 10 years, this ETF has positioned itself in the top quartile of its peers.

The Vanguard Dividend Appreciation ETF and Vanguard International Dividend Appreciation ETF follow the same strategy but focus on different geographical regions. Both ETFs seek companies with a 10-year history of increasing dividend payments, emphasizing high-quality and stable businesses. The Vanguard Dividend Appreciation ETF offers a 12-month dividend yield of 2.04%, while its international counterpart yields 2.24%.

Investors looking for income stability and growth can find solace in these dividend funds, particularly in a market environment where bond prices are falling as yields rise. By diversifying their portfolios and incorporating these well-performing ETFs, investors can potentially achieve better risk-adjusted returns and secure a steady stream of income.

In conclusion, as bond yields surge, dividend funds emerge as an exciting and intriguing alternative for income hunters. The top-rated ETFs, such as SCHD, VYM, VIG, and VIGI, have consistently delivered impressive returns and offer investors the opportunity to benefit from the stability and growth potential of dividend stocks. By considering these funds, investors can navigate the changing market dynamics and secure their financial future.