U.S. dividend income funds are attracting strong flows this year as investors seek shelter from geopolitical risks and opt for stable, income-generating equities.
LSEG Lipper data shows U.S. dividend funds have attracted $24.1 billion in inflows so far this year, the highest level in the first quarter (Q1) in four years. They posted Q1 outflows in the previous three years.
"Investors are gravitating toward dividend strategies as a way to balance income needs with equity exposure amid ongoing rate uncertainty and market volatility," said Jun Li, EY’s Global and Americas Wealth & Asset Management Leader.
"If rate volatility and growth uncertainty persist, dividend strategies are likely to remain in favor beyond the near term."
Among leading funds, the Schwab U.S. Dividend Equity ETF has attracted about $4 billion in inflows so far this year, while the Capital Group Dividend Value ETF has drawn over $3 billion and the VanEck MSCI Developed Markets Dividend Leaders UCITS ETF has received more than $2 billion.
Dividend funds are also benefiting from their higher exposure to oil and natural gas companies, which are gaining from the surge in crude prices driven by the Iran conflict.
Analysts said they are likely to remain in favor as long as oil prices stay elevated, tensions surrounding the Strait of Hormuz remain unresolved and investors seek alternatives to artificial intelligence-related investments.
The shift into dividend funds also comes as bond markets face one of their biggest routs in years, with inflation fears prompting investors to scale back expectations of rate cuts in major economies.
"Dividends are not replacing bonds on a structural level. However, in this environment, they are acting as a partial substitute," said Shanon Davis, chief executive officer at American Alternative Assets.
"The comparative advantage of dividend funds is that they offer income alongside some inflation pass-through, particularly in energy sectors where profits rise with oil prices."
