With inflation firmly entrenched in the current economic setting, investors are evaluating strategies that offer protection against soaring consumer prices.

A solid avenue for gaining that protection is via dividend stocks and the related exchange traded funds, including the ALPS Sector Dividend Dogs ETF (SDOG). Up 3.28% year-to-date while the S&P 500 is lower by more than 4%, SDOG is proving its inflation-fighting capabilities, but there’s more to the story, and it’s good news for investors.

“Dividend-paying stocks have historically been a successful way to protect capital against inflation. In addition to stock price appreciation that occurs during inflationary periods, companies also tend to increase their dividend distributions. This trend continued in 2021 when aggregate US dividend payments rose by 6.5% while consumer price index (CPI) came in at 4.7%,” according to IHS Markit research.

When it comes to income, SDOG has the goods. The ALPS fund currently sports a dividend yield of 3.22%, or nearly 200 basis points in excess of the S&P 500 and well ahead of the yield found on 10-year Treasuries.

SDOG’s equal-weight sector strategy is also meaningful in the current climate because some groups are better able to exert pricing power than cap-weighted, broader market funds, and SDOG features large weights to some of those sectors, including consumer staples.

“If a company changes the price of its good and consumer demand is not impacted, its product is said to be demand inelastic. Food and beverage companies have shown that they fall into this category and have been utilizing their pricing power to sustain margins,” adds Markit.

Two other points in favor of SDOG are forecasts calling for robust domestic dividend growth this year, and the fact that the ALPS fund features scant exposure to groups that could end up being dividend disappointments.

“Aside from auto producers, airline operators, and a select few others, we do not expect inflation to impact broader dividend payments in the short-term of 2022. A rising tide lifts all ships and most industries have been able to stay afloat. We are forecasting aggregate dividend payments in the United States to increase 8% during 2022 to an impressive USD670 billion. With that said, inflation does not usually remediate quietly, and there are ample downside risks in the medium term,” concludes Markit.

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).

For more news, information, and strategy, visit the ETF Building Blocks Channel.

 

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.