U.S. dividend funds receive huge inflows as investors switch out of bonds

Dollar banknotes are seen through printed stock graph in this illustration
REUTERS/Dado Ruvic

Feb 9 (Reuters) - U.S. investors are snapping up funds that invest in dividend-paying stocks as they search for stable income from alternatives to bond markets, which are being roiled by the prospect of rate rises.

According to Refinitiv Lipper, investors bought $6.9 billion in U.S. dividend funds in January, the highest net purchases since October 2006.

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The Schwab US Dividend Equity ETF and SPDR S&P Dividend ETF led inflows, receiving about $1.7 billion each last month, while First Trust Rising Dividend Achievers ETF obtained $1 billion.

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There has been elevated volatility in global equity markets this year on concerns over higher yields and inflation levels, which tend to squeeze corporate profit margins.

Dividend funds are seen as safe and offering some stability in that scenario, as they hold well-established companies that have better pricing power and a track record of providing stable income.

"As a total return manager, we do look for capital appreciation when markets are doing well and rely on income from dividends to help when markets become volatile or negative," said Ryan Fause, a portfolio manager at Pinnacle Associates based in New Jersey.

"As we see growth stocks struggle and prevailing interest rates still somewhat low, we do find comfort in owning dividend stocks as a core part of most portfolios."

Dividend funds' higher inflows were also due to the recent investor shift towards what are called value stocks, and away from the growth stocks, the latter referring to equities with higher potential which had outperformed during the initial rapid recovery from the coronavirus pandemic.

Economists predict moderate growth this year, prompting investors to look back at stocks trading at affordable levels, or value stocks, which often also offer higher dividends.

Sectors such as energy and banks, which have high dividend yields, are expected to enjoy revenue growth this year, benefitting from higher interest rates and inflation levels.

"Value has been a strong performer as economic growth and earnings growth are starting to settle back down toward longer-term growth rates, and companies that are cheaper will do better than companies that are highly priced," said Gina Sanchez, chief market strategist at Lido Advisors in California.

Bond markets have been choppy after the Federal Reserve indicated a faster pace of monetary tightening and tapering of its asset purchases this year.

According to Lipper data, net sales of U.S. bond funds rose to $20 billion in January, the biggest outflow since March 2020.

"Virtually no bond funds look attractive right now. Investors looking for safety and yield are turning to stocks with low volatility and consistent dividends," said Terri Spath, chief investment officer at Zuma Wealth in Los Angeles.

"Do we think this is a good direction? We say yes."

Reporting by Patturaja Murugaboopathy in Bengaluru Editing by Vidya Ranganathan and Matthew Lewis

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