The superior performance of growth stocks, exposure to companies that are often below average on sustainability and the big impact the corona pandemic had on seemingly certain dividends has made dividend funds unpopular among investors. However, with the rotation towards value stocks under way, there is hope for a revival for income-oriented equity funds.
Although very low interest rates have fuelled investors’ search for yield, global dividend funds have not been particularly popular over the past 10 years. The strong momentum among growth stocks and the excellent performance of internet, software and e-commerce companies, which often pay no or very limited dividends, have given investors little reason to prefer the generous dividend yield of dividend funds.
What’s more, the increasing importance of sustainability considerations has been a factor that has kept investors away from dividend funds, as sectors such as tobacco, energy, utilities, mining and financials tend to be heavily represented in these portfolios. The reduction or elimination of dividend payments by global companies at the onset of the corona pandemic, prompted by drastically worsening economic conditions, prudence or political pressure, has put dividend funds in an even more difficult position.
Hungry for dividend funds
That does not mean, however, that there has been no demand for dividend funds at all. The Morningstar Global Equity - Dividend category still had 105 unique funds distributed in Europe in 2012. That number stands at 191 by the end of 2021. Assets under management in the category also increased. A decade ago, these funds managed 34 billion euro; at the end of 2021, partly due to price increases, the 100 billion euro mark was broken for the first time.
However, the road to this was bumpy, with years of moderate inflow and strong outflow in 2018 (10 billion euro) and 2020 (3 billion euro), resulting in a net outflow over the last five years of 7.6 billion euro.
What is striking about the funds that have seen the light of day more recently is that they have a stronger sustainability focus than the more traditional dividend funds, for example by excluding sectors or industries or by applying minimum sustainability standards. Providers of traditional dividend funds have also launched a more sustainable variant. In 2017, for example, DWS launched the DWS Invest ESG Equity Income, rated Bronze by Morningstar Analyst, as a sustainable variant of its flagship DWS Top Dividend.
Broader definition of dividend investing
Another observation is that new funds often use a broader definition of dividend investing, whereby partial investment can be made in stocks that offer a (sharply) lower dividend yield than the market, or even in stocks that do not (yet) pay any dividends at all. Investors should not be surprised to find Microsoft, Apple or ANTA Sports, all of which offer a dividend yield below 1 percent, in these portfolios.
Although growth and lower-dividend stocks have been superior in recent years, more traditional and high-dividend yield mutual funds have had the wind in their sails over the past 12 months. Rising commodity prices drove strong price gains for miners and oil companies, while rising interest rates and the resumption of dividend payments helped the banking sector.
Top five
The top five global dividend funds, measured by performance over the past 12 months, are led by VanEck Vectors Morningstar Developed Markets Dividend Leaders UCITS ETF with a return of almost 36 percent. The ETF tracks the Morningstar Developed Markets Large Cap Dividend Leaders Index, which is composed of the top 100 stocks by dividend yield and meets screening criteria, including companies with a stable and sustainable pattern of dividend payments.
This ETF has a strong value profile, which is also reflected in the sector weightings. For example, financials make up a quarter of the portfolio, but there is also an overweight on the energy sector which makes up 15 percent of the index after adding top holdings Exxon Mobil and Chevron in December 2021. The dividend yield of around 5 percent is high compared to peers, whose portfolio offers an average dividend yield of 3.25 percent. Positions in The Toronto-Dominion Bank, Bank of Novia Scotia and Royal Bank of Canada, among others, helped the ETF to the leading position.
