With equity markets slumping in the first half of 2022, valuations on a variety of segments are more attractive today than they were in 2021. That includes select dividend growth stocks.
That could be a boon for exchange traded funds, including the SmartETFs Dividend Builder ETF (DIVS). Discounts on dividend growth equities are something to consider for multiple reasons, not the least of which is the point that owing to quality traits and steady payout growth, dividend growers usually aren’t inexpensive on valuation.
Adding to the alluring valuation situation, dividend growth stocks, including DIVS components, have other tailwinds for equity income investors to consider.
“Companies with growing dividends tend to be profitable and financially healthy—two valuable qualities during periods of economic uncertainty,” wrote Morningstar’s Susan Dziubinski. “Such companies are also more likely to have significant competitive advantages that may allow them to pass along price increases and thereby maintain margins during inflationary times. Dividend-growth stocks tend to be less volatile than the overall market.”
For long-term investors, it’s rarely a bad time to get into the dividend growth game, but the current environment is ripe for this investing style. Even when ignoring the aforementioned compelling valuations, dividend growth stocks merit attention today due to rising interest rates and rampant inflation.
Historical data indicates payout growth is one of the primary avenues through which investors can potentially thrive in high inflation environments.
As for DIVS, which is managed by Guinness Atkinson Asset Management, the ETF offers investors several benefits, including scant exposure to traditionally high-yield sectors, a focus on quality, and no dependence on the prosaic measure of a company’s prior dividend growth trends.
Among the dividend growth stocks that are undervalued today that are also members of the DIVS portfolio, medical device giant Medtronic (NYSE: MDT), a wide moat name, makes the cut.
“Medtronic stock is trading about 26% below our fair value estimate of $129 per share. As one of the largest medical device companies with a product portfolio covering a wide range of chronic diseases (think pacemakers, heart valves, insulin pumps, and surgical tools), Medtronic is a key partner for its hospital customers,” concluded Dziubinski. “As a result, we think the company has significant competitive advantages and assign it a wide economic moat rating. Although Medtronic has experienced some supply chain challenges lately, we view these issues as near-term speed bumps, says Morningstar senior analyst Debbie Wang. The company has raised its dividend for 45 consecutive years.”
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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.