After years of dominance by growth stocks, dividend funds had slowly become the wallflowers of the investment universe. Investors flocked to technology, e-commerce and internet companies, which emerged as the stars in the stock market firmament partly due to the corona crisis and the resulting generous monetary policy of central banks. Barring some brief periods of outperformance, value stocks slid deeper and deeper into the mothball bin. However, a value renaissance began in late 2020, which received a firm tailwind in 2022.
Value stocks, which usually include dividend stocks, experienced an excellent year in 2022. Rapidly rising inflation and a drastic turn in monetary policy by central banks caused growth stocks to plunge sharply and investors to switch to lower-valued, profitable companies with robust balance sheets, preferably those with reliable dividends.
The turn towards dividends was also reflected in the 2022 yield for dividend stocks. The MSCI World High Dividend Index closed the year in the black, with a return of 1.5%. This contrasted with the broader equity market, where the MSCI World Index suffered a loss of over 12%.
A key factor behind this outperformance is the strong investment performance achieved in sectors that are typically rich in dividend-payers. Energy stocks were the absolute tastemakers, with a mix of underinvestment and the impact of Russia’s invasion of Ukraine on the global oil market driving oil and gas prices up sharply. Oil companies posted record profits, which benefited investors through generous dividends, among other things. Defence, tobacco, utilities, financials and healthcare also performed relatively well, all known as prominent sectors in dividend portfolios.
Renewed investor interest
The positive sentiment surrounding dividend stocks also renewed investor interest in dividend funds. The funds united in the Morningstar Global Equity - Dividend category realised net inflows of 19.7 billion euros in 2022, pulverising the record inflows of 2013 when more than 12 billion euros of investor money flowed into global dividend funds. It was also the third-largest inflow across all Morningstar categories in the past year. The total assets under management of global dividend funds thus grew to €118 billion by the end of 2022, practically a tenfold increase from assets under management at the end of 2009.
Although the dividend category has traditionally been the domain of actively managed strategies, here, too, we see passive funds quietly advancing. At strategy level, while Fidelity Global Dividend had the largest inflow with a net inflow of EUR 2.2 billion, at fund level the Vanguard FTSE All-World High Dividend Yield UCITS ETF is among the three mutual funds that generated the most inflows, amounting to EUR 1.4 billion. The iShares MSCI World Quality Dividend ESG UCITS ETF and the SPDR® S&P Global Dividend Aristocrats ETF are also among the more popular options among dividend investors, with net inflows of around EUR 400 million. Despite passive dividend funds appearing more on investors› radar, active dividend funds remain the preferred option overall, with net inflows of €15.7 billion in 2022.
VanEck Morningstar Developed Markets Dividend Leaders
The top five global dividend funds, based on returns for the 12 months ending 31 January 2023, for the mutual funds in the Morningstar Global Equity - Dividend category, is led by the VanEck Morningstar Developed Markets Dividend Leaders UCITS ETF, which trailed the competition by a wide margin with a 12.8% return. The ETF tracks the Morningstar Developed Markets Large Cap Dividend Leaders Index, which is composed of the top 100 stocks based on dividend yield and meeting its screening criteria, including companies with a stable and sustainable pattern of dividend payments. The ETF has a strong value profile, which is also reflected in its sector weightings.
For instance, financial sector stocks dominate the portfolio. At the start of 2022, the sector had a weighting of 26%, which was further increased after the two semi-annual reweightings, so that the sector currently accounts for almost 40% of the portfolio. BNP Paribas, Allianz, The Toronto-Dominion Bank and Bank of Nova Scotia all have a place in the top-10 portfolio holdings. Utilities and energy are also overweight against competitors.
SPDR S&P Global Dividend Aristocrats
In second place, we again find a passive solution, namely the SPDR® S&P® Global Dividend Aristocrats ESG ETF. This ETF combines ESG considerations with the investment principles of dividend investing. Dividend history is central to this ETF, with US stocks required to have increased or maintained their dividends for at least the past 20 consecutive years, where this threshold is 10 years for other equity markets. Stocks in the investable universe are then ranked based on their S&P DJI ESG scores, with the worst scoring 25% excluded. Exclusions are also made on the basis of product involvement, excluding tobacco producers, among others.
The portfolio is substantially different from the typical competitor in the category. A strong value profile is combined with an all-cap profile, with about 27% of the portfolio invested in small-caps. Although the dividend yield of 4.8% is relatively high, the portfolio scores low when it comes to quality. Financials also dominate in this portfolio, with a weighting of around 30%.
Top 5 Global Dividend Funds, YTD to 31 Jan. 2023:
Jeffrey Schumacher is director manager research at Morningstar. Morningstar analyses and evaluates investment funds based on quantitative and qualitative research. Morningstar is one of Investment Officer’s knowledge partners and ranks five mutual funds or providers every week.
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