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Shouldn’t Higher Rates Be Bad for Stocks? The Answer Is Complicated
Shouldn’t Higher Rates Be Bad for Stocks? The Answer Is Complicated

Investors Stick to Stock Funds, Even as Equities Tumble

The S&P 500 index has slid 16% so far in 2022, and the technology-heavy Nasdaq Composite has dropped 25%.
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With stocks tumbling this year, you might think that investors are exiting their stock funds in droves. But that’s not happening.

The S&P 500 index has slid 16% so far in 2022, and the technology-heavy Nasdaq Composite has dropped 25%.

However, for every $100 of inflow to stock funds from January 2021 through May 11, there has been only $4 of outflow, according to Bank of America’s analysis of data from EPFR. The data include flows for retail and institutional investors in mutual and exchange-traded funds.

So why are investors sticking with stocks? Just as in recent years, many investors see equities ultimately providing the best returns compared to most other asset classes. In recent years, stocks led the way, as markets went up in unison. And now many investors see equities as the best house in a bad neighborhood.

Bonds have tumbled along with stocks this year. The Bloomberg U.S. Aggregate bond Index has lost 10% year to date. Real estate has declined too, with the FTSE Nareit All Equity REIT index slipping 15% so far this year.

To be sure, commodities have shined, with the S&P GSCI commodity index soaring 36% so far this year. The war in Ukraine has helped boost commodity prices. But commodities are notoriously volatile, so many investors are cautious about investing in them for the long term.

Equities have outperformed bonds over the long run. So it may make sense to avoid abandoning stocks. They averaged an annual return of 11.82% from 1928 until 2021, compared to 5.11% for Treasury bonds, according to the St. Louis Federal Reserve bank.

If you do opt for equities, dividend stocks may offer some safety. Many of them can continue to provide you with regular income in times of volatility. The S&P 500 Dividend Aristocrats index has slipped 8% so far this year through May 13, just half the decline registered by the S&P 500 as a whole. The former index includes stocks that have raised their dividends for at least 25 straight years.

Here are two of Morningstar’s top-rated dividend-stock mutual funds.

Vanguard Dividend Growth Fund (VDIGX)

The fund focuses on high-quality companies that have both the ability and the commitment to grow their dividends over time. Morningstar gives the fund its top rating of gold.

Fund manager Donald Kilbride’s strategy in building its 40- to 50-stock portfolio “blends disciplined, benchmark-agnostic focus on firms likely to continue increasing their dividends at a double-digit rate with a willingness to learn and adapt,” Morningstar analyst Alec Lucas wrote in a commentary.

T. Rowe Price Equity Income Fund (PRFDX)

The fund seeks a high level of dividend income and long-term capital growth. Morningstar gives it the firm’s second highest rating of silver. The fund has a “strong analyst team and well-executed process,” Morningstar analyst Adam Sabban wrote in a commentary.

“While dividend-paying stocks feature prominently in this strategy, income is but one of a few considerations. Manager John Linehan won’t reach for yields while compromising on fundamentals, though he’ll sometimes lower his quality criteria for a stock trading at a large perceived discount.”