Higher Rates Unlikely to Weigh on Dividend Stocks, ETFs | ETF Trends

It’s no secret that the Federal Reserve is cruising toward multiple interest rate increases this year in an effort to damp inflation, but that doesn’t mean that dividend stocks and exchange traded funds will languish.

Actually, some market observers believe that dividend stocks could prove resilient as rates rise, and that could be constructive for ETFs such as the ALPS Sector Dividend Dogs ETF (SDOG). As highlighted by a yield of 3.19%, SDOG fits the bill as a high dividend strategy, but that doesn’t mean it will be vulnerable to Fed tightening.

That’s an important factor because inflation data imply that the Fed essentially has to raise borrowing costs. Some experts argue that the central bank is already late to the inflation-fighting party, suggesting that the Fed could hike more times than expected this year.

“But when you look at the average inflation rate for the full year this year, we’re looking at about 3.6%. Having said that, it will continue to moderate in the second half well into 2023,” says Morningstar analyst Dave Sekera. “So, then, we’re looking for inflation to drop all the way down to 1.4% before going back to more like a normalized kind of 2.2%, 2.3% long-term inflationary run rate.”

Inflation is meaningful with regards to SDOG for another reason. Although the ALPS fund is positioned as a high dividend ETF, S&P 500 payouts are forecast to hit another record this year after doing so in 2021. Said another way, domestic dividend growth is expected to be impressive in 2022, and that’s beneficial to SDOG investors because dividend growth usually outpaces inflation. Additionally, plenty of SDOG holdings are expected to boost payouts.

Bottom line: Even in a multi-hike environment, SDOG could deliver the goods for investors in 2022. It already is. The ALPS fund is higher by almost 2% year-to-date while the S&P 500 is lower by nearly 6%.

“So, even with those three rate hikes this year, we’re still only getting to 0.75% to a 1.00% fed-funds rate, which when you look at a historical long-term chart, the only time we’d ever been there before was during the global financial crisis and never even had a federal-funds rate that low in the past. So, from my perspective, I don’t expect increases in short-term rates really to impact those dividend-paying stocks,” concludes Sekera.

Other high-dividend ETFs include the SPDR S&P Dividend ETF (SDY), the iShares Select Dividend ETF (NYSEArca: DVY), and the iShares Core High Dividend ETF (HDV).

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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.