Dividend Growth Still an All-Weather Strategy | ETF Trends

Not all investing styles offer resilience across a variety of market settings — hence the term “style.” However, dividend growth is durable in an assortment of market conditions.

That positive attribute isn’t a guarantee of upside in bear markets. Still, dividend growth investing offers volatility-reducing properties, quality traits, and an avenue for investors to reduce dependence on slower-growth bonds as sources of income.

“Stocks with a history of dividend growth, on the other hand, could present a compelling investment opportunity in an uncertain environment. An allocation to companies that have sustainable and growing dividends may provide exposure to high-quality stocks and greater income over time, therefore buffering against market volatility and addressing the risk of rising rates to some extent,” according to S&P Global.

More Reasons to Consider Dividend Growth

Because growth stocks outperformed value for a decade prior to 2022, younger or new investors may not be aware that dividends reinvested represent a significant portion of a portfolio’s returns over time. That highlights the power of compounding, but it’s even more powerful when the payouts are growing. Additionally, corporations dedicated to increasing their dividends often exhibit other traits seasoned investors prioritize.

“Dividend growth stocks tend to be of higher quality than those of the broader market in terms of earnings quality and leverage. Quite simply, when a company is reliably able to boost its dividend for years or even decades, this may suggest it has a certain amount of financial strength and discipline,” added S&P Global.

One way of looking at the above is that not all dividend-paying equities are created equal. Those with high yields often seduce investors seeking large dividends, but owing to high leverage and low return on equity, among other dubious traits, those firms are also the most likely to cut or suspend distributions.

Additionally, dividend growers can function as cushions against volatility. In nearly every bear market spanning 1999 to 2022 — a period including the dot-com bubble bursting and the global financial crisis, broad baskets of dividend growth equities outperformed the market.

This style of investing offers another benefit: Resilience at times when interest rates rise. The reason for that is many dividend growth stocks and the related funds aren’t heavily allocated to rate-sensitive sectors such as real estate and utilities. Many payout growth funds lean into consumer staples, healthcare and, more recently, tech stocks, among other less rate-sensitive groups.

Investors looking for an actively managed payout growth strategy can consider the T. Rowe Price Dividend Growth ETF (TDVG).

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.