More than $18 billion has gone into the equity-income funds and ETFs in the first eight months of this year, according to Lipper–the largest amount of cash flow of any Lipper equity fund category year to date.
But investors need to watch their backs, cautions Vanguard Chief Economist Joe Davis in a recent blog post: Substituting dividend-paying stocks for bonds entails taking on greater risk.
“I’d like to point out that dividend-paying stocks are not bonds,” Davis explains in the blog. “As one can see … income-focused stock funds, be they dividend-paying funds or REIT funds, tend to correlate with the broader equity market.”
While at times dividend-paying funds can outperform the broader equity market, using dividend-paying stocks instead of bonds in order to generate greater income means that investors are employing “a more aggressive and more stock-heavy strategic asset allocation,” Davis (left) points out.