Interest rates have a ways to go to become normalized; even with the Federal Reserve likely to hike rates multiple times this year, yields on government bonds are likely to remain low.
That’s conducive to high-dividend strategies such as the ALPS Sector Dividend Dogs ETF (SDOG). Making SDOG all the more appealing as an idea for 2022 are a couple of dividend-specific factors. First, the S&P 500 payouts are coming off a banner year in 2021 in which they ascended to record highs and clawed back — and then some — the losses incurred at the hands of the coronavirus bear market in 2020.
Second, some market observers argue that there’s still dividend normalization that needs to occur and that shareholder rewards, including buybacks, will be priorities for companies this year.
“I would expect most companies will continue to keep paying that same type of ratio that they’ve paid in the past,” says Morningstar analyst Dave Sekera. “From there, when you have excess cash flow, there might still be some companies out there that think they’re a little bit over-levered, might use that in order to pay back debt.”
Among specific dividend stocks that could be compelling this year, Sekera highlights AT&T (NYSE:T), though he cautions investors that the telecom company could dramatically cut its payout, directing the savings to reducing debt.
“They’ve done a number of different corporate actions. Probably the most important, in my view, would be is that they’re spinning off their WarnerMedia subsidiary,” Sekera adds. “And we think that’s really going to help that company unlock shareholder value as well as really be able to refocus that business back on kind of that communications part of the business that they kind of lost that focus a number of years ago.”
AT&T is SDOG’s largest holding at a weight of 2.26%. The analyst also mentions consumer staples names Conagra Brands (NYSE:CAG) and Kellogg (NYSE:K) as inflation-fighting ideas.
“But if we’re wrong and inflation is more persistent, I’d much rather be invested in those companies with a wide economic moat, because those are going be the companies that have the pricing power to be able to pass through their own cost increases to their own consumers, be able to maintain their margins, and even if the rest of the market is selling off because of inflation, those are the ones I would expect to hold their value,” observes Sekera.
Conagra Brands accounts for 2.11% of the SDOG roster.
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.
