Precious metals have become a popular play to hedge against rising inflation while the U.S. government and Federal Reserve throw out trillions of dollars to spend our way out of a recession. Exchange traded fund investors, though, can consider dividend strategies as a better inflation hedge.
Morningstar’s Director of Global ETF Research, Ben Johnson, highlighted the surge of popularity in gold-backed ETFs, which, since the market bottomed out in late March, have attracted cumulative net inflows of $24.3 billion, compared to $19.7 billion for equity ETFs.
However, Johnson warned that this recent surge in interest for gold-backed ETFs is similar to buying flood insurance after one is already swimming in your living room. Most of the year-to-date inflows into gold have come after March 23rd, but over that time period, stocks have outperformed gold by over 20%.
On the other hand, Johnson argued that stocks can benefit from the broader growth of the economy and dividend-paying stocks are a better way to stay ahead of rising inflation.
“Investors should keep in mind that one of the best long-term inflation hedges is exposure to equities which will benefit from the broader growth in the economy,” Johnson said in a note. “Income-oriented equities that have historically managed to grow their payouts to shareholders at a rate greater than inflation are easier to stick with as they produce regular income unlike gold, which is a pet rock at the end of the day.”
Consequently, Johnson believed that investors should look at dividend-growth ETFs, highlight dividend growing strategies that focus on companies consistently increasing dividend payouts. For example, te Vanguard Dividend Appreciation ETF (NYSEArca: VIG), the largest dividend-related ETF on the market, tracks U.S. stocks that have increased dividends on a regular basis for at least 10 consecutive years. Additionally, the Schwab US Dividend Equity ETF (NYSEArca: SCHD) includes 100 stocks based on strong fundamentals, such as cash flow to debt, return on equity, dividend yield and consistent dividend payouts for at least 10 consecutive years.
For more information on dividend stocks, visit our dividend ETFs category.