Fixed income investors who relied on bonds for most of 2022 may see rising yields, but inflation has obviously stifled price appreciation. Looking ahead to 2023, investors can opt for dividends to shore up their fixed income portfolios.
Strategists at JPMorgan are already anticipating a drop in bond yields next year. According to a Reuters report, there will be “a $700 billion contraction in global bond demand next year compared to 2022, while bond supply will likely drop by $1.6 trillion, J.P. Morgan strategists, led by Nikolaos Panigirtzoglou, estimated in the note issued on Thursday (November 25).”
“Based on the historical relationship between annual changes in excess supply and the Global Aggregate bond index yield, a $1 trillion improvement in the demand/supply balance would imply downward pressure on Global Aggregate yields of around 40 basis points,” said JPMorgan.
One only has to take a look at the S&P 500 Bond Index to get an idea of how bonds have been battered. The index is down about 14% for the year, following stocks on the way down as inflation and recession fears have put a stranglehold on the capital markets.
As mentioned, this is where dividend stocks can be of benefit. Rather than strictly looking at yields, investors should focus on stocks that can sustain their dividends, particularly in the current market environment where many unknowns still exist.
ETF Options for Dividend Exposure
As opposed to looking for individual stocks with potent dividends, exchange traded funds (ETFs) can offer an all-inclusive option. That said, investors will want to take a look at the WisdomTree U.S. Total Dividend Fund (DTD) for broad exposure.
The fund invests in companies from all market caps that pay dividends within the U.S. equity market. The fund seeks to track the WisdomTree U.S. Dividend Index, a fundamentally weighted index based on dividend projections for the next year, and is comprised of U.S. companies that pay dividends regularly.
Another fund to consider with a dividend growth slant is 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 fund seeks to track the WisdomTree U.S. Quality Dividend Growth Index, a fundamentally weighted index based on dividend projections for the next year, which screens companies for long-term growth expectations, return on equity, and return on assets.
For strict exposure to dividend-paying large-cap companies, consider the WisdomTree U.S. LargeCap Dividend Fund (DLN), which focuses on core U.S. large-cap equity securities. It’s a fund that can be used to either replace or complement a large-cap value or dividend strategy and seeks to track the 300 biggest companies by market cap and dividend weights based on projected dividends over the upcoming year.
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