Inflation remains high, and with little sign of that scenario relenting anytime soon, investors are scurrying for ways to buffer their portfolios against the ravages of soaring consumer prices.
Fortunately, market participants don’t have to stretch into exotic or risky territory because some tried-and-true strategies are meaningful during high inflationary times. That includes dividend growth stocks and exchange traded funds, such as the WisdomTree U.S. LargeCap Dividend Fund (NYSEArca: DLN).
DLN follows the WisdomTree U.S. LargeCap Dividend Index, which weighs member firms based on cash dividends paid — a quality methodology that identifies dependable sources of current and future payout growth.
“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 both beating inflation and accessing reliable dividend growth, sector exposures matter. On that front, DLN has the goods. For example, the $3.44 billion ETF allocates about 48% of its total weight to technology, healthcare, and consumer staples — groups with pricing power. Pricing power is a desirable trait in inflationary environments.
“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.
Industrials, which account for almost 8% of DLN’s roster, are another example of a sector where some companies are navigating today’s inflationary times by passing along higher costs to clients that need their goods and services.
“In an industry like manufacturing, the end customer is primarily another corporation rather than a consumer. Nonetheless, the sector has been able to increase prices with the same limited impact to demand,” notes Markit.
The research firm adds that, at some point, rising prices will bite consumers. To that end, consumer discretionary stocks account for less than 5% of DLN’s roster. Markit adds that heavily indebted companies are vulnerable to surging inflation.
“Companies that borrow continuously or have a lot of debt will see their payments increase meaningfully. With more cash going to interest payments there will be less available for dividend payments,” concludes the research firm.
Fortunately, many DLN components have strong balance sheets.
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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.