$17.5 billion in funds flow into high-dividend ETFs, as the Federal Reserve's interest rate cut expectations ignite a surge in high-dividend assets

According to Zhitong Finance APP, high dividend stocks have recently become the market focus, with a significant influx of funds. Data from Purpose Investments Inc. shows that last week, the top five global high dividend exchange-traded funds (ETFs) attracted a net inflow of $17.5 billion, nearly ten times the level at the beginning of 2024.

Behind this phenomenon is a strong market reaction to expectations of interest rate cuts by the Federal Reserve. As bond yields may decline, investors seeking stable returns are turning their attention to high dividend assets in the equity market.

It is noteworthy that high dividend strategies have performed relatively poorly in recent years, unexpectedly pushing up dividend yields. Purpose's chief strategist Craig Basinger pointed out: "The dividend factor has underperformed the market in recent years, and this value gap effect has amplified the current dividend payout rate."

BlackRock's research report indicates that the current relative valuation of high dividend stocks is at a ten-year low: the price-to-earnings ratio of the S&P 500 High Dividend Index is only 14.2 times, significantly narrowing the premium over technology stocks. This amplifies their dividend appeal. Data shows that this week, 45 companies in the S&P 500 Index have a 12-month dividend yield exceeding the three-month U.S. Treasury yield of 4.33%, a significant increase from 14 companies last year.

The dynamics of the U.S. Treasury market have also fueled interest in high dividend assets. Except for the longest-term varieties, most U.S. Treasury yields have retreated from their peaks two years ago. The aggressive rate hike cycle implemented by the Federal Reserve to curb inflation had previously pushed yields higher, but the market has recently entered a volatile period, with investors closely monitoring signals of a policy shift. In this context, high dividend companies like Dow Chemical (DOW.US) are favored, with a current dividend yield close to 10%, doubling from last year's level.

However, the performance of high dividend ETFs remains lackluster. For example, Charles Schwab's U.S. Dividend ETF has only risen 1.3% this year, while the S&P 500 Index has increased by 7.9% during the same period, indicating that it may underperform the benchmark index for the third consecutive year. Analysts point out that these ETFs typically lack exposure to growth sectors like technology stocks, which have been the main drivers of market gains in recent years.

More concerning is that U.S. corporate dividend growth is facing pressure. Howard Silverblatt, a senior analyst at S&P Dow Jones Indices, stated that uncertainty in trade policy and concerns about the economic outlook led to a narrowing of the dividend increase for S&P 500 constituents in the second quarter to $9.8 billion, far below the $19.5 billion in the first quarter. Independent strategist Jim Paulsen compared the current three-year dividend growth rate to that during the 2000 tech bubble, suggesting that companies may be hoarding cash in preparation for a potential economic recession Nevertheless, investors chasing yields have not backed down. Bessinger emphasized: "The dividend winter seems to be coming to an end." In an environment where asset prices are relatively low, the cash flow advantage brought by high dividends remains attractive. Whether this migration of funds can continue will depend on the interplay between the Federal Reserve's policy shift and corporate earnings prospects