[Practical Finance] Year-End Stock Market at Zero Hour... Still, the 'Dividend ETF' Blooms

Dividend Aristocrat Stocks, Market Returns Up
Dividend Theme Index Also Shows Outstanding Returns

[Image source=Yonhap News]

[Asia Economy Reporter Myung-hwan Lee] As the domestic stock market walks through an unpredictable foggy path, securities experts advise considering investment in high-dividend Exchange Traded Funds (ETFs). This is due to the high dividend (distribution) yields of dividend ETFs and their notable defensive characteristics in a declining market.

Perfect for Downturn Defense... Focus on 'Dividend Aristocrats' with High Dividend Yields

According to the securities industry on the 23rd, there are a total of 28 dividend stock-tracking ETFs listed on the domestic stock market as of this date. These ETFs use dividend-related indices such as high dividend or dividend growth indices provided by index calculation agencies as their underlying assets. The recent operational performance of dividend ETFs has been favorable. Among them, excluding ‘SOL US Dividend Dow Jones’ which was listed on the 15th, the average stock price fluctuation rate over the past month (October 18 to November 18) for the remaining 27 ETFs was 5.05%. All ETFs, except for three that track dividend-related indices in the US stock market, saw their stock prices rise.

Given the increasing uncertainty in the global stock market, securities experts advise focusing on ETFs that concentrate on dividend stocks. Due to factors such as the US monetary policy characterized by interest rate hikes and a strong dollar until the end of this year, and persistent inflation, it is difficult to predict the direction of the stock market easily. Therefore, attention should be paid to the defensive nature of dividend ETF returns. Since these ETFs are based on high-dividend stocks, investors can also expect ETF distributions. Distributions refer to the payment of dividends and other operating income generated during ETF management to investors.

Among these, there is advice to pay special attention to ETFs that selectively invest in ‘Dividend Aristocrat’ stocks. The Dividend Aristocrat strategy involves selecting and investing in companies that have consecutively increased dividends over the past 4 to 5 years and have high dividend yields. According to Eugene Investment & Securities, the Dividend Aristocrat ETF investment strategy has significantly outperformed market returns. Its defensive appeal in a declining market is also prominent. The Dividend Aristocrat portfolio composed of domestically listed stocks fell 17% until October this year. Compared to the KOSPI 200 index, which gathers blue-chip stocks in the Korea Exchange and fell 24% during the same period, this is a relatively smaller decline.

Some dividend-themed indices tracked by dividend stock ETFs have also recorded excellent cumulative returns. According to Shinhan Investment Corp., the KOSPI High Dividend 50 Index outperformed the KOSPI by 3.6% in the fourth quarter of last year. Shinhan Investment Corp. expects the high dividend index to achieve an excess return of 3.5% over the index in the fourth quarter of this year as well. Lee Jung-bin, a researcher at Shinhan Investment Corp., forecasted, "As the burden of inflation and interest rate hikes increases going forward, the appeal of stable dividend stocks will be highlighted."

Funds Flowing to US Stock Market Dividend ETFs... "Strong Performance Expected Next Year"

Dividend ETFs listed on the US stock market also deserve attention. Like domestic ETFs, US-listed ETFs that focus on dividend stocks have shown the best operational performance. In particular, the long-term performance of the dividend growth stock theme has been the strongest. The S&P 500 Dividend Aristocrats Index in the US stock market has risen 35 times since 1990. This significantly outperforms the S&P 500 Index, which rose 20 times during the same period.

The returns of US dividend ETFs are also favorable. The ‘Vanguard High Dividend Yield’ (VYM), which mainly invests in high-dividend stocks, rose 9.23% in the past month. During the same period, the ‘Schwab US Dividend Equity’ (SCHD) also recorded a respectable stock price increase of 8.31%.

The flow of funds into dividend ETFs is gradually increasing. SK Securities researcher Koo Kyung-hoe said, "The net inflow into high-dividend ETFs recorded $1.96 billion in October," adding, "Considering the sluggish inflow of funds into the overall stock market due to rising interest rates, this is a very favorable result."

US dividend ETFs also show notable defensive appeal in downturns. According to Eugene Investment & Securities, dividend investment ETFs with assets under management exceeding $1 billion as of early this month fell an average of 2.5% since the beginning of this year. Considering that the S&P 500 Index dropped 20% during the same period, this is a commendable performance.

Responding through dividend ETFs also seems effective in next year’s stock market. Kang Song-cheol, a researcher at Eugene Investment & Securities, analyzed, "The relative strength of US Dividend Aristocrat ETFs compared to the market declined from mid-2016 until the end of last year but has rebounded since this year," adding, "It is expected that the relative strength phase of quality stocks such as Dividend Aristocrats will continue next year as well."

This content was produced with the assistance of AI translation services.