While at times overlooked, dividends have played a substantial role in investor returns over the past several decades. From 1960 through the end of last year, roughly 85% of the S&P 500 Index’s cumulative total return can be attributed to reinvested dividends and the power of compounding. Dividend-focused strategies provide the potential for better stability, consistent income, and a hedge against economic uncertainty for all-weather portfolios.
As a new environment of tariff turmoil in the United States continues to prompt market volatility, investors are increasingly turning to dividend-focused strategies to boost portfolio resilience. Following an era dominated by growth stocks, dividend investing has seen something of a revival. US-listed, dividend-focused exchange-traded funds (ETFs) saw average monthly net inflows of nearly US$3.3 billion for the six months ending January 31, 2025, compared to US$107 million for the same period last year.1
The current murky global outlook understandably has investors seeking refuge in more stable components for a balanced portfolio. Dividend stocks—especially those with high-quality characteristics—can offer steadier and more predictable cash flows. And since such cash flows are key to many equity valuation models, estimating the intrinsic or fundamental value of dividend-paying stocks tends to involve less ambiguity than attempting to pinpoint fair valuations for growth stocks. Therefore, we believe dividend stocks can serve as a buffer in a diversified portfolio.
In our opinion, the appeal lies in their ability to moderate volatility during market drawdowns, while still offering significant upside potential. Dividend strategies have consistently demonstrated defensive properties across regions and varying timeframes. For the three-year period ending December 31, 2024, both volatility and maximum drawdowns for dividend payers were lower compared to the broad market across global, US and European exposures.2 When inflation and interest-rate fears reignited last August, dividend stocks held up comparatively well.3
Perhaps as a testament to the value investors place on the dividends in their portfolios, we have seen strong asset gathering in US-listed dividend ETFs even when fixed income ETFs are paying attractive yields. Dividend ETFs that target US exposures continue to dominate market share of U.S-domiciled ETFs, holding US$360 billion in assets (76% of all dividend ETF assets), with US$17.5 billion in new assets over the past year.4
International developed market dividend ETFs—which still comprise just a fraction of the US market—have also grown in popularity and attracted nearly US$3 billion in net inflows last year, representing 13% of total dividend ETF inflows.5
There are various approaches to dividend investing across this large pool of assets. For example, we’ve seen income-hungry investors making core allocations to rules-based, or multifactor, dividend strategies that incorporate active risk awareness by aiming to maximize yield per unit of tracking error relative to the broad market.
Other compelling strategies also employ custom indexes aimed at delivering excess or multiplied dividend yield relative to the broader market. These approaches present the potential for enhanced long-only equity income, underpinned by robust proprietary optimization methods that can more holistically consider how dividend stocks behave together. As enhanced versions of the first generation of rules-based portfolios, we believe these strategies may allow portfolios to be more responsive to shifting market environments, while incrementally increasing yield.
Looking ahead, we believe dividend strategies should continue to play a vital role in portfolios. Valuations in market-cap indexes, especially in the United States, remain ambitious given the potential disruptions that loom over global trade. In this environment, we believe dividend stocks of firms with proven business models and solid profitability will tend to be sought after and present a compelling alternative to more growth-oriented exposures. With sentiment for growth stocks now at a tipping point, we believe a favorable backdrop for dividend strategies has emerged.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal. Large-capitalization companies may fall out of favor with investors based on market and economic conditions.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
Distributions are not guaranteed and are subject to change. Yields may be affected by changes in interest rates and changes in credit ratings.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets.
Diversification does not guarantee a profit or protect against a loss.
ETFs trade like stocks, fluctuate in market value and may trade above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. ETF shares may be bought or sold throughout the day at their market price on the exchange on which they are listed. However, there can be no guarantee that an active trading market for ETF shares will be developed or maintained or that their listing will continue or remain unchanged. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress.
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1. Source: Morningstar Direct, as of February 2025.
2. Source: Bloomberg, Franklin Templeton 2025.
3. Ibid.
4. Source: Morningstar Direct, as of January 31, 2025.
5. Ibid.
