The traditional school of thought regarding dividends is that they are generally to be avoided at all costs in a rising rate environment, but investors continue to pile into them as market volatility continues. The reason? Chalk it up to COVID-19, economic stimulus, supply chain issues, war in Ukraine, or a dozen other potential contributors to the state of the economy and markets now; the only certainty that can be said is that these are unprecedented times for the U.S.
Dividend-yielding stocks and funds typically perform poorly in rising rate environments because, historically, if interest rates are increasing, it’s being driven by a growing economy. According to the Wall Street Journal, investors prefer growth-oriented equities in a thriving, growing economy where there is greater potential for bigger profits than bond-like payouts from dividend stocks.
That’s certainly not the case currently, where the Fed is raising interest rates and shedding bonds from its balance sheets beginning in June as it works to directly fight the soaring inflation, all while economic growth has slowed in recent months. Inflation isn’t being driven by a rapidly growing, booming economy but by a blend of factors that have contributed to very unprecedented inflationary pressures.
“Part of the popularity of the high-dividend players has been the ‘nowhere to hide’ narrative in the markets this year,” Art Hogan, chief market strategist at National Securities Corporation, told WSJ.
With equities and bonds both in the negatives for much of 2022 so far, advisors and investors are seeking income where they can, and dividends have proven to be a popular choice with their promises of guaranteed payouts over the short term. It’s this reliability that is most appealing in a market fraught with uncertainty.
“I don’t want high risk. I want a cereal company with a dividend that I know is coming,” said Steve Chiavarone, head of multiasset solutions and senior portfolio manager at Federated Hermes.
Investors are enjoying the extra benefit that many dividend-paying companies are within the energy sector, which has seen share prices jumping significantly this year with the war in Ukraine. The S&P 500’s energy sector has risen 47% year to date, and oil and gas companies are thriving.
Investing in U.S. Dividends with WisdomTree
WisdomTree offers a suite of dividend ETFs for investors looking for exposure to U.S. equities, whether within core allocations or with a value focus. Options include the WisdomTree US Quality Dividend Growth Fund (DGRW), which invests in large-cap U.S. equity companies that are growing their dividends and applies both quality and growth screens to securities, the WisdomTree U.S. LargeCap Dividend Fund (DLN), which invests in large-cap companies that pay dividends within the U.S. equity market, and the broader WisdomTree U.S. Total Dividend Fund (DTD) that invests in companies from all market caps that pay dividends within the U.S. equity market.
There is also the popular WisdomTree U.S. High Dividend Fund (DHS) which invests in high dividend-yielding U.S. equity companies for investors looking for higher-yielding opportunities.
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