Can Dividend ETFs Endure Fed Rate Hikes?

Financial markets expect the Federal Reserve will raise interest rates at its meeting this week. The notion of higher interest rates could be cause for some concern among dividend investors, but there are dividend exchange traded funds that survive and thrive as U.S. monetary policy turns hawkish.

The Schwab US Dividend Equity ETF (NYSEArca: SCHD) is one dividend ETF that could be particularly well-suited for a rising rate environment, especially when considering the ETF uses a methodology that does not include focusing on high yields. Dividend ETFs that are weighted that way can expose investors to rate-sensitive sectors.

SCHD includes 100 stocks based on strong fundamentals, dividend yields and consistent dividend payouts for at least 10 consecutive years, and it has a trailing 12-month dividend yield that is above the yield on 10-year Treasuries. SCHD charges just 0.07%%, or $7 per $10,000 invested. Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as a new breed of funds that look for sectors chock full of stocks that have the potential to be future sources of dividend growth.

“If the Fed tries to push rates too high, too fast and recessionary concerns become more real, investors will likely flock towards conservative areas, such as utilities and consumer staples, that are traditionally more recession-proof. These companies also tend to pay above average dividends making them viable alternatives to Treasuries despite their rising rates. Income seekers may not want to lock up their money for 10 years or more in a Treasury note yielding only 2-3%. These stocks offer greater flexibility albeit at a slightly higher risk level,” according to ETF Daily News.