Dividend growth and inflation are usually viewed through separate lenses, but history indicates that the former is useful for investors looking to beat the latter.
That enhances the relevance of exchange traded funds like the Invesco Dividend Achievers ETF (PFM) in the current market environment. PFM follows the NASDAQ US Broad Dividend Achievers™ Index, which requires that member firms have payout increase streaks of at least 10 years.
“More than just providing a steady income stream, dividend-paying stocks have become a part of the conversation lately since they also protect your money against inflation, making them ideal for today’s market conditions,” reports Elizabeth Gravier for CNBC.
The average market capitalization of PFM’s 375 components is $269 billion, which isn’t surprising given that it is large-cap companies that are most known for dividends and, more importantly, dependable doses of payout growth. PFM’s status as a large-cap fund also highlights the ETF’s benefits as an inflation-fighting tool.
“Large companies that have a long history of paying consistent dividends each year have something to their advantage in an inflationary environment: they can weather — and actually benefit — from higher price,” according to CNBC.
There’s also ample evidence suggesting that payout growth and the reinvesting of those payments play pivotal roles in a portfolio’s long-term outcome.
Mike Schenk, deputy chief advocacy officer for policy analysis and chief economist at the Credit Union National Association, noted in an interview with CNBC “that historically, dividend payments have accounted for roughly 40% of total stock market returns. During inflationary times especially, investors can benefit from having portfolios that include stocks that increase their dividends the most.”
In addition to evaluating PFM’s inflation-fighting merits, investors should also consider the fund’s sector exposures because the fact is, some groups have better dividend reputations than others. On a related note, PFM devotes nearly 30% of its weight to healthcare and financial services stocks — two leaders in terms of domestic dividend growth.
PFM also has future sources of reliable dividend growth covered with a 20.1% allocation to tech stocks. That’s a low-yielding sector with scores of cash-rich companies, implying that there’s plenty of room for tech dividends to continue growing over the long term.
PFM has a 12-month distribution rate of 1.86%, which is by no means high and implies room for growth. About a third of the fund’s holdings are considered value stocks.
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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.