U.S. dividend ETFs, which provide investors with a regular stream of current income, have clearly underperformed the growth stocks like technology this year. This happened because the latter was hit hard by higher interest rates last year. But the tables turned in favor of the latter in the first half of 2023 due to easing inflation, chances of a slide in rates and the AI boom.

However, the upbeat May jobs data recently boosted the chance of another Fed rate hike in July. This might dampen tech stocks and boost dividend ETFs all over again. After all, dividends have made up roughly 40% of stock returns over the past 100 years, per a Barron’s.com article .

Let’s delve a little deeper.

Valuation Advantage

The performance gap between the iShares Select Dividend ETF (DVY Quick QuoteDVY - Free Report) (down 7.8%) and the Nasdaq 100 ETF (QQQ Quick QuoteQQQ - Free Report) (up 33.3%) has widened the valuation gap this year. The median stock in the iShares ETF trades at about 12 times 2024 earnings, while the Nasdaq 100 trades at about 22 times, per the Barron’s.com article.

ProShares S&P 500 Dividend Aristocrats (NOBL Quick QuoteNOBL - Free Report) yields just 1.92% and trades at about 19 times 2024 earnings. It offers quality exposure, which can be “cheap for a reason,” writes Chris Senyek, chief investment strategist at Wolfe Research, as quoted on Barron’s.

No wonder, the relative attractiveness of dividend stocks is a plus for dividend ETFs like DVY amid any kind of uncertainty in the economy. Notably, in a 2021 research report by S&P Global, the S&P 500 High Dividend Index was compared with the S&P 500 Growth Index. The high dividend index had a P/E ratio nearly half that of the growth index, emphasizing its valuation advantage.

Higher Yield

While the ETF DVY yields 3.82%, the fund QQQ yields 0.61%, resulting in agap of 321 basis points. That’s too large a difference and makes higher yield a lucrative factor for investors. Higher yields often makes up for the capital losses, if there are any.

Lower Volatility

High-dividend ETFs tend to have lower volatility than growth stocks. During the dot-com bubble of the late 1990s and early 2000s, growth stocks were the darlings of the market. However, when the bubble burst, they suffered significant losses. On the other hand, dividend-paying stocks exhibited less price volatility during this period, and their dividends cushioned against losses. The same story may be repeated if recessionary fears flare up.

Superior Performance During Bear Markets

High-dividend ETFs have also historically performed better during bear markets. A study by Ned Davis Research from 1972 through 2013 showed that dividend-paying stocks outperformed non-dividend-paying stocks during market downturns. High-dividend ETFs, given their focus on these types of stocks, may offer some degree of downside protection in challenging market conditions.

Reinvestment Opportunities

Dividends received from high-dividend ETFs offer a chance to buy more shares, thereby compounding returns over time. The power of dividend reinvestment is a significant component of total return. A study by the Global Investment Return Yearbook revealed that reinvested dividends contributed to approximately 85% of the total return of the S&P 500 from 1900 to 2010.

Dividend ETFs in Focus

Below we highlight a few dividend ETFs that have a lower P/E than the Nasdaq.

SPDR S&P Emerging Markets Dividend ETF (EDIV Quick QuoteEDIV - Free Report) ) – 4.43% Yield; P/E: 6.70X

Nationwide Nasdaq-100 Risk-Managed Income ETF ) – 7.49%; P/E: 0.03X

WisdomTree Japan Hedged SmallCap Equity Fund (DXJS Quick QuoteDXJS - Free Report) ) – 3.20%; P/E: 9.97X

RiverFront Dynamic US Dividend Advantage ETF (RFDA Quick QuoteRFDA - Free Report) ) – 3.17%; P/E: 0.04X