Investors seem increasingly interested in dividend-focused strategies amid an environment of continued rollercoaster markets, due to turmoil over tariffs and other uncertainties in the US and globally.
Portfolio resilience is a key driver behind the trend towards dividend investing, said Dina Ting, head of global index portfolio management at Franklin Templeton – assuming target firms have proven business models and solid profitability.
“The current murky global outlook understandably has investors seeking refuge in more stable components for a balanced portfolio,” Ting explained. “Dividend stocks – especially those with high-quality characteristics – can offer steadier and more predictable cash flows.”
More reliable and stable
This reinforces the importance that dividends have played over recent decades. For example, said Ting, from 1960 through to 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.”
More specifically, based on Franklin Templeton research using Bloomberg data, dividend strategies have consistently demonstrated defensive properties across regions over the three years to the end of 2024. During this period, both volatility and maximum drawdowns for dividend payers were lower compared with the broad market across global, US and European exposures.
Further, such cash flows are key to many equity valuation models, which Ting said shows that estimating the intrinsic or fundamental value of dividend-paying stocks tends to involve less ambiguity than attempting to pinpoint fair valuations for growth stocks.
“We believe dividend stocks can serve as a buffer in a diversified portfolio,” she added.
Dividend flows gaining momentum
After so much recent attention on growth stocks, US-listed, dividend-focused exchange-traded funds (ETFs) saw average monthly net inflows of nearly $3.3bn for the six months ending January 31, 2025, according to Morningstar Direct (February 2025), compared with $107m for the same period last year.
Notably, strong asset gathering has come even when fixed income ETFs are paying attractive yields. According to Morningstar Direct figures as of January 31, 2025, dividend ETFs that target US exposures continue to dominate market share of US-domiciled ETFs, holding $360bn in assets (76% of all dividend ETF assets), with $17.5bn in new assets over the past year.
Dividend ETFs with exposure to global developed markets have also grown in popularity, added Tong, albeit from a low base.
Diversity in dividend strategies
Ting highlights multiple approaches to dividend investing. “We’ve seen income-hungry investors making core allocations to rules-based, or multifactor, dividend strategies that incorporate active risk awareness by aiming to maximise yield per unit of tracking error relative to the broad market.”
Meanwhile, custom indexes can also be used to deliver 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 optimisation methods that can more holistically consider how dividend stocks behave together,” explained Ting.
As enhanced versions of the first generation of rules-based portfolios, Franklin Templeton believes these newer dividend strategies may allow portfolios to be more responsive to shifting market environments, while incrementally increasing yield.
