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Highlights
- Higher yields and inflation that threatened to squeeze corporate profit margins, have elevated volatility in equity markets.
- Financial institutions with high dividend yields are likely to see revenue growth from the higher rates.
- Bond markets have been wobbling after Fed recommended a faster pace of monetary tightening.
US investors are picking up dividend funds as they seek an alternative to the bond market amid rate fears, Reuters reported. The market worries have deepened, fuelled by record-high inflation.
Economists expect the latest CPI data due later this week to show higher inflation in January, in line with the continuing price spike. In December, the CPI rose to 7% from 6.8% in the previous month, the highest increase since 1982.
US investors switch to dividend funds, dump bonds
Reuters on Wednesday reported that US investors bought US$6.9 billion in US dividend funds last month, the highest net purchases since October 2006.
The report said that dividend equity ETFs like SPDR S&P saw inflows in billions of dollars last month. The First Trust Rising Dividend Achievers ETF received US$1 billion.
Higher yields and inflation that threatened to squeeze corporate profit margins have elevated volatility in the equity markets. Dividend funds are relatively stable during times of inflation as they hold companies with reputable track-record.
Higher inflows were also due to the recent shift of investors toward value stocks as the growth stocks took a beating in the recent sessions amid rate concerns.
Growth stocks had outperformed during the initial recovery from the pandemic.
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Besides, economists’ prediction of a moderate growth rate in 2022 prompted investors to look for budget stocks that offer higher dividends.
For instance, bank stocks may benefit from the rate hike. Financial institutions with high dividend yields are likely to see revenue growth from the higher interest rates. The energy stocks could see gains from higher energy prices.
Reuters reported citing market data, that the sales of US bond funds surged to US$20 billion last month, the biggest outflow since March 2020.
Bond markets have been wobbling after Fed recommended a faster pace of monetary tightening.
