The Fed’s Next Move: What Lower Yields Mean for Dividend ETFs

The world is sitting back waiting, not-so-patiently, to see what the Federal Reserve, led by Jerome Powell, decides to do with interest rates ahead of 2026. After just announcing a rate cut at the end of October, Powell was unclear about whether another rate cut would come in December. All of this means that the investment world is waiting with bated breath to see what Powell will say next.

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Regardless of whether another rate cut comes in December, there is no question that the lower yield will impact dividend ETFs. For the millions of people who have turned to this investment strategy for income and stability, these rate cuts could be a blessing or a curse.

Chairman Powell made it clear that any decision on the FED’s next move will be based on how inflation, employment, and growth data evolve over the next several weeks. Traders lowered the odds of a December rate cut to 67%, down from 90%, according to CME Group’s FedWatch, which is something to consider if you are a betting person.

Why Falling Rates Matter for Income Investors

The odds of another rate cut this year aside, there should not be any question of a connection between the FED policy and income investing, and it’s all pretty simple, actually. When the FED cuts rates, cash stops paying as well. The prevailing theory, and what history has shown, is that yields on money market funds and short-term Treasurys, which hit over 5% last year, will begin to decline.

In turn, this makes dividend-paying stocks and ETFs look a whole lot more appealing. To put this another way, the “safe” yield on cash that has been anchoring portfolios over the last 24 months is now losing its edge as rates decline. Morgan Stanley strategist, Todd Castagno, said it best when he wrote, “In periods of elevated risks and valuations, dividends become a more important part of total returns, dampening volatility and supporting stock prices.”

To Todd’s point, this is already happening as dividend ETFs, particularly those focused on dividend growth, are already seeing renewed interest as investors start to reposition their portfolios for slower growth and lower yields.

A Dividend Lineup That Stands to Benefit

When rates fall, or if they fall more this year or early in 2026, you can be sure that not all dividend strategies are going to perform equally. What we know is that the winners of these rate cuts are generally going to be the funds that combine strong payout histories with financial discipline. In other words, this means companies that can sustain and grow their dividends, rather than stretch to pay them.

ProShares S&P 500 Dividend Aristocrats ETF

If you want some staying power against rate cuts, look to the ProShares S&P 500 Dividend Aristocrats ETF (NASDAQ:NOBL). While the current dividend yield of 2.13% won’t knock your socks off, it has big names like C.H. Robinson Worldwide, AbbVie, Lowe’s, and Caterpillar as its biggest holdings.

Because of these big names, I can say they’re built for resilience, not hype, and this fund has historically outperformed the broader S&P 500, especially in volatile periods, so it’s a good place to park your money right now.

Schwab U.S. Dividend Equity ETF

One of the most popular dividend ETFs in the U.S. today, the Schwab U.S. Dividend Equity ETF (NYSE:SCHD) is poised to continue performing well, even as rates decline. You have consistent payouts, a 3.90% annual dividend yield, and the Schwab U.S. Dividend Equity ETF might be one of the best balances between income and growth potential. The fund is heavily invested in healthcare, financials, and industrials, sectors that typically perform well when rates fall and borrowing costs ease up.

JP Morgan Equity Premium Income ETF

For those of you out there looking to chase higher monthly income, the JP Morgan Equity Premium Income ETF (NYSE:JEPI) is a great choice. Using a covered call strategy to generate extra income, the JP Morgan Equity Premium Income ETF is a solid performer even amid market volatility.

Yes, this means you are going to give up some upside during a bull market, but in calmer conditions, like one that starts to slow with market rate cuts, you still have the confidence of a reliable paycheck. This is because the current 8.42% annual dividend yield is hard to beat right now.

Where Dividend ETFs Fit In a Lower-Yield World

At the end of the day, as inflation cools and the Fed shows signs of patience, investors will want to look beyond short-term cash instruments. The days of the 5% savings account are going to start coming to an end, which makes dividend ETFs and the stability of passive income look pretty good.

If you are an investor focused on your total return and not just yield, dividend ETFs might be the best place you can be. It also helps to look at sectors like utilities, financials, and REITs that all benefit from falling rates as they may see renewed strength.

It really doesn’t matter if the FED makes another rate cut this year or at the beginning of next year, as your key concern is to maintain order in your portfolio and stick with ETFs that have strong balance sheets and are well diversified by sector. The bottom line: Don’t just chase yield for yield’s sake.

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