Why Are Investors Turning to Dividend Strategies?

Over the first nine months of 2024, global dividend ETFs listed on Europe’s stocks exchanges gathered €2.2 billion of inflows³, which we believe could grow to €3 billion by the year end. That compares with €2.8 billion in 2022, the previous record, and just under €2.0 billion in 2022.

Retail investors seeking potential income through savings schemes have been among the biggest sources of demand, with the VanEck Morningstar Developed Markets Dividend Leaders UCITS ETF experiencing strong inflows from them in Germany especially. But wealth managers and banks have also been strong buyers of High-Dividend Strategies.

As interest rates have fallen in Europe, so the income paid by dividend stocks stands out. Many dividend stocks still yield over 5% at the time of writing, which is considerably more than government bonds and cash accounts.⁴

With populations ageing, there’s burgeoning demand for reliable income in retirement. For instance, in Germany more than a fifth of the population is aged 65 or older. By 2050, that number is expected to be almost a third. These retiring baby boomers’ investment priorities are shifting from capital appreciation to income and wealth preservation.

Risk tolerance tends to fall with age, but rather than relying on fixed income strategies investors appear to be turning to dividend strategies with their potentially relatively higher real income yields.

Multiple expansion and capital inflows have driven up prices, though not excessively, as a response to declining interest rates. This trend has compressed yields, making it increasingly challenging to find value in high-dividend stocks, which could enhance the appeal of growth stocks. Over the past year, global dividend yields have decreased by approximately 16%—with the estimated yield for the Morningstar Developed Markets Large and Mid-Cap Screened Select Index declining from 2.1% to 1.75%.⁵ In contrast, the stocks in the High Dividend index have shown resilience, experiencing only a modest decline from 5.45% to 5.33%, which is still less pronounced than the potential decrease observed in fixed income yields.

High dividend strategies are not primarily designed to outperform broader market benchmarks consistently. Instead, they aim to provide investors with a reliable source of dividend income that complements their core portfolio allocation. While dividend stocks have demonstrated strong long-term performance, they have also experienced periods of underperformance relative to the broader market, largely due to its underweight position in low dividend paying growth stocks.

If the shine comes off technology stocks in a world where rates fall but don’t approach the ultra-low levels of the 2010s, then the contribution of dividends to long-term capital returns may come to the fore once more. In that case, investors would have even more reason to turn to dividend strategies than the evident income advantages. Please remember that financial markets are constantly changing and investing in Dividend ETFs involves Risk, including Equity market risk and foreign currency risk. Please refer to the KID and the Prospectus for other important information before investing.