Heading into 2022, advisors and investors are likely tiring of hearing about inflation, but the reality is that elevated consumer prices are still going to be an issue to contend with in the new year.
A familiar avenue for staying ahead of rising inflation and maintaining a portfolio’s purchasing power is dividend growth stocks. The WisdomTree U.S. LargeCap Dividend Fund (NYSEArca: DLN) is one of the prime exchange traded funds offering exposure to stocks with healthy payout growth prospects.
A staple in several of WisdomTree’s model portfolios, DLN tracks the WisdomTree U.S. LargeCap Dividend Index. The index is a fundamentally weighted index that is comprised of the large-capitalization segment of the U.S. dividend-paying market. Its methodology makes DLN an ideal consideration for an environment in which inflation is now well into persistent territory.
Although interest rates are likely to rise next year, Treasury yields remain low by historical standards, and as those yields rise, the prices on the underlying bonds decline. David Bailin, chief investment officer at Citi Global Wealth Investments, tells Barron’s that fixed income investors face difficult choices.
Bailin and his team recently authored Citi’s 2022 investment outlook in which they discuss “Why dividends matter more today than ever.”
The $3.28 billion DLN, which is 15 and a half years old, is dividend weighted annually to reflect the proportionate share of the aggregate cash dividends that each component company is projected to pay in the coming year, based on the most recently declared dividend per share. The fund isn’t bound by yield weighting, ensuring that investors get a clean, quality basket of stocks with sturdy dividend growth prospects.
DLN’s methodology is all the more important because the dividend yield on the S&P 500 is just 1.33%.
“That makes picking the right dividend stocks more important, Chronert adds, noting that he expects S&P 500 dividends to grow 10% to 15% next year, in line with what they did following the 2008-09 financial crisis and before the onset of the pandemic,” reports Lawrence Strauss for Barron’s, citing Scott Chronert, a domestic equity strategist at Citi.
Citi’s preferred industries and sectors for dividends are semiconductors, consumer staples, and healthcare. DLN answers that call because technology, healthcare, and consumer staples stocks combine for nearly half the fund’s weight. Seven of the fund’s top 10 holdings hail from those three sectors.
“For bonds, of course, inflation is the enemy mainly because it erodes the value of fixed coupons. Companies have the advantage of being able to increase their dividends above the inflation rate,” according to Barron’s.
That’s an indication that DLN could be a safe haven for investors as inflation treks higher in 2022.
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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.