Market Overview

Dividends Eclipsed More Records In 2018 Even As ETFs Fell

Dividends Eclipsed More Records In 2018 Even As ETFs Fell

The S&P 500 closed lower on an annual basis in 2018, weighing on dividend exchange traded funds in the process, but it was still a good year for dividend growth.

S&P 500 dividends hit a record $14.19 per share on a quarterly basis, or $119.80 billion. The SPDR S&P 500 ETF (NYSE: SPY), the world's largest ETF, has a trailing 12-month dividend yield of 2.04 percent.

What Happened

With the Federal Reserve having raised interest rates four times in 2018, it's unsurprising that some dividend stocks and ETFs struggled. The upside to that scenario is that some companies may have been compelled to boost dividends to compete with the higher yields offered by less risky U.S. government debt.

The “average Q4 2018 dividend increase in the S&P 500 was 10.24 percent, down from 10.41 percent during Q4 2017; 2018 average is 13.48 percent, up from 2017’s 11.36 percent,” according to S&P Dow Jones Indices.

Last year, the aggregate dividend increase was slightly off 2017's level, but so were dividend cuts.

“For Q4 2018, aggregate increases amounted to $11.9 billion, down from Q4 2017’s $12.4 billion,” said S&P Dow Jones. “Aggregate dividend cuts decreased to $4.5 billion from $7.9 billion for Q4 2017.”

Why It's Important

Amid 2018's backdrop of rising interest rates, dividend growth ETFs fared less poorly than their high dividend counterparts. The Vanguard Dividend Appreciation ETF (NYSE: VIG) and the SPDR S&P Dividend ETF (NYSE: SDY) posted an average loss of 2.4 percent last year.

VIG requires member firms to have dividend increase streaks of at least a decade, while SDY components must have dividend increase streaks of at least 20 years.

Conversely, the Vanguard High Dividend ETF (NYSE: VYM) and the iShares Select Dividend ETF (NASDAQ: DVY) — both high dividend strategies — posted an average annual decline of about 6 percent last year.

High dividend ETFs could find some support this year if the Federal Reserve slows its pace of rate hikes or if investors embrace defensive sectors such as consumer staples and utilities. Utilities stocks account for nearly a third of DVY's weight.

What's Next

The stage is set for more dividend growth in 2019.

“Based on their current payout policies, S&P 500 2019 dividends already have a 3.5-percent tailwind built in, setting the stage for potentially another record year, with the increase again expected to outpace wage growth and inflation,” said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

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