Exchange traded funds that target dividend-paying companies with a history of increasing payouts are attracting more attention as the markets face a rising inflation outlook.
For example, the Vanguard Dividend Appreciation ETF (NYSEArca: VIG), the largest dividend-related ETF on the market, brought in $12.6 billion in net inflows over the past week, according to ETFdb data. VIG 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) saw $5.2 billion in net inflows over the past week. 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.
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 the equities market, which typically rises along with the broader growth in the economy. Additionally, income-oriented equities that have historically managed to increase their dividend yield to shareholders at a rate above the pace of inflation are more attractive since they produce regular income, unlike hard asset inflation hedges like gold, which don’t come with any yields.
Steady dividend payouts have also helped produce improved risked-adjusted returns over time. The highest-quality companies have proven their ability to grow their dividends over time, surviving through a range of market environments, and even raising dividends after previous recessions.
On the other hand, those that have cut dividends have been punished by the markets. This is especially important over the past year since under the CARES Act stimulus bill lending program, companies receiving federal assistance have, among other restrictions, been prohibited from paying a dividend for a period of time.
For more information on dividend stocks, visit our dividend ETFs category.