While the S&P 500 has recorded an incredible rally lately, topping the 5,000-mark, there are valid reasons to approach the current situation with caution. As the S&P 500 continues to hit fresh all-time highs, its valuation is reaching new heights as well. Notably, the S&P 500 has surged 21% since late October. SPDR S&P 500 ETF Trust SPY is now available at as high as $498.32.
The S&P 500’s forward price-to-earnings ratio — a commonly used metric to value stocks — this week rose to 20.4 times, a level last reached in February 2022, according to LSEG Datastream. That puts it far above the index’s historic average of 15.7, as quoted on a Yahoo Finance article.
Rise of Stock Valuation Despite Uptick in Treasury Yields
Stock valuations have risen even as Treasury yields have increased this year, following an uncertainty regarding the timing of the start of Fed rate cuts. Higher yields tend to affect equity valuations negatively as it means bonds are offering more investment competition to stocks and that future company cash flows are valued less highly.
That means stock valuations could record further uptrend ahead if the Fed delivers its widely expected cuts and yields slump. And while a more optimistic earnings outlook would support the lofty valuation, profit expectations for 2024 have largely remained stable this earnings season as companies have reported results.
Lowered Corporate Earnings Expectations Even for Future Outlook
Despite the strong Q4 results, the outlook for future quarters remains uncertain, lacking positive momentum. Although the earnings picture has improved since the start of 2024, results are still far below what Wall Street had expected just four months ago.
Moreover, both first-quarter and full-year 2024 earnings estimates have declined since January 1st, as many companies have issued cautious guidance during this earnings season, as quoted on CNBC (read: Should You Be Overwhelmed by Solid Q4 Earnings? ETFs to Play).
Why Cheap Dividend ETFs Are Good Bets
Dividend ETFs can be a good investment during times of uncertainty, as they provide a steady source of income regardless of market conditions. These types of stocks and ETFs typically pay out a higher percentage of their profits as dividends than other stocks, which means that they can make up for the capital losses, if there is any.
Cheap Dividend ETFs in Focus
Against this backdrop, below we highlight a few high-dividend ETFs that outperformed the S&P 500 index (up 4.55%) past month and these dividend ETFs are available at much more lower price than SPY.
First Trust NASDAQ Technology Dividend Index Fund TDIV
One-Month Price Gain: 6.85%
Nationwide Nasdaq-100 Risk-Managed Income ETF NUSI
One-Month Price Gain: 6.78%
Capital Group Core Equity ETF CGUS
One-Month Price Gain: 6.29%
Pacer Metaurus US Large Cap Dividend Multiplier 400 ETF QDPL
One-Month Price Gain: 6.23%
Siren DIVCON Leaders Dividend ETF LEAD
One-Month Price Gain: 6.13%
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