Where Have All the Dividends Gone? ETFs Tell the Story

Where Have All the Dividends Gone? ETFs Tell the Story

T-bills continue to compete with dividend funds for investor attention.

Reviewed by: Ron Day
Edited by: Kent Thune

Only 19 stocks in the S&P 500 yield more than 5%, and within the Russell 3000 index, only about 100 have a yield that high. So, more than 95% of the stock market yields less than T-bills.

Put all that information together, and it puts dividend stocks and dividend ETFs in a challenging position. If they don’t provide 2%-4% annual price appreciation above the dividend payout for the next few years, they risk being considered undesirable by investors and financial advisors.

Dividend ETFs vs T-Bill Rates

Here's a breakdown on yields for dividend ETFs versus short-term Treasury ETFs:

  • The four largest dividend ETFs that prioritize dividend yield (as opposed to dividend growth, which tends to keep the yield lower) all yield between 2.5% and 3.5%.
  • Two prominent T-Bill ETFs, the $32 billion SPDR Bloomberg 1-3 Month T-Bill ETF (BIL) and the $19 billion iShares Short Treasury Bond ETF (SHV) each yield at least 5.1% and have been well above dividend ETF yields for a while now.
  • Since the start of 2022, when the Federal Reserve delivered a series of 11 rate increases, that pair of T-Bill ETFs has produced competitive returns with three of those four ETFs.
  • The one exception, the $65 billion Vanguard High Dividend Yield ETF (VYM), whose returns were boosted mightily by a pair of technology stocks (Broadcom and Qualcomm) which now yield 1.4% and 1.6% respectively. 

In other words, what drove those excess returns the past few years won’t replicate it as far as the dividend yield goes, assuming those stocks even remain in the ETF much longer, given those paltry yields.

Dividend ETF Trailing Returns

Three-year trailing returns for many dividend ETFs are weak and getting weaker. That’s because the SPDR S&P 500 Trust ETF (SPY) advanced 14% from this time in 2021 through the end of that year.  

Translation: if SPY doesn’t continue to rally from there, that 14% gain falls off the three-year rolling return and is replaced by something less. At the same time, T-Bill rates are either stubbornly high if you are a dividend manager, or gloriously high if you are an investor since that 5%+ yield comes with no price risk. And with Baby Boomers retiring in droves, that is a higher “do nothing’ return than they’ve seen in their investment lifetimes.  

The last time they could get to that level was briefly back in 2006 and in 2000, and higher rates (7% range) in 1994. But Boomers were not retirees back then. They were early to mid-career types, to whom T-Bill rates meant very little. I know because, along with a few of my etf.com colleagues, I was one of them!

Investors Can Change How They Use Dividend ETFs

One of the great things about ETFs is that you know what you’re getting. If an ETF is based on an index, knowing how that index is constructed, when it adjusts positions, weightings or both, and what stocks are likely to be included in it are all things investors and advisors can approximate on their own. Active ETFs are different, but the advantage there is that the investor is offloading the research process entirely.  

Covered call ETFs now offer a way for investors to boost yields versus what dividend ETFs offer, which is close to what those same ETFs spun out in dividend yield three years ago. But back then, T-Bill yields were near zero, and thus there was no competition.  

Awareness is Key With Dividend ETF Investing

All these worlds are colliding. Dividends are low on a percentage basis, and with companies choosing to buy back stock more often than jack up dividend payments, that is unlikely to change soon. The shortest path for higher dividend rates on ETFs is a market decline or crash, and that essentially defeats the purpose of owning them through that decline.  

What’s the adjustment for investors and advisors to consider? It starts by understanding better what is inside those dividend ETFs, what drives their income and total return. And, perhaps learning about how to manage those sources of investment income more actively, to produce more yield through tactical management.  

Most importantly, as with so much investing, the key is awareness. Understanding that this intriguing shift has occurred, and that dividend ETFs now have a lot more to prove, is the inception of getting the best of the markets in the years ahead. 

Rob Isbitts was an investment advisor for 27 years before selling his practice to focus on ETF research and education. He is based in Weston, Florida. Contact him at  [email protected] and follow him on LinkedIn.