The great dividend debate has always been between growth vs. yield. Dividend growth stocks are the classic long-term play, with high yield stocks being the go-to for people who need income more immediately and are willing to sacrifice better long-term returns for stronger short-term gains.
The markets are in an unusual place today, however, and it could be wise to lean towards dividend growth over high yield. Despite companies being flush with cash and ready to pay out dividends, income is increasingly challenging to find. According to The Motley Fool, the S&P 500 has a current dividend yield of just 1.33%. With an inflation of 5.39% and a rocky bond space, reliable income feels elusive.
Pivot to Dividend Growth
There’s a case to be made for an injection of high yield dividend ETFs. If income is hard to find right now, then intuitively it makes sense to grab onto some high yield stocks and try to sprint past inflation. But the race against inflation isn’t a sprint; it could very well turn into a marathon.
“It’s probably the single biggest threat to, certainly, financial markets, and I think to society just in general,” billionaire Paul Tudor Jones told CNBC in an Oct. 20 interview. Tudor’s fellow billionaire Jeff Gundlach thinks that increased wages for lower salary jobs will push up wages for supervisors as well, driving up rents and accelerating inflation. “We’re going to get persistently high inflation thanks to the shelter component,” Gundlach said. Gundlach also thinks that inflation is likely to stay above 4% at least through 2022.
Dividend growth ETFS like the Guiness Atkinson SmartETFs Dividend Builder ETF (DIVS) are well built for these kinds of moments. DIVS focuses on quality companies tilted toward dividend growth. The focus on quality means that these companies seek to be durable and consistent even in chaotic, volatile times. Though dividends can sometimes appear to lose ground to inflation, they historically outpace it. Holding firm with quality dividends can keep your portfolio afloat even when the market is in disarray.
If high yield still holds some appeal, there are funds like the Global X SuperDividend ETF (SDIV) that can help round out your dividend picture. SDIV currently has an impressive 7.69% dividend yield and offers exposure to a wide array of dividend-paying equities. It has a global scope that gives it the tactical diversity needed for this unusual moment.
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