Can Dividend ETFs Fight High Inflation Scenarios?

Inflation isn’t alarmingly high yet, but advisors and investors can prepare for the worst with quality dividend growth strategies, including the WisdomTree U.S. LargeCap Dividend Fund (NYSEArca: DLN).

DLN, which is featured in some of WisdomTree’s model portfolios, seeks to track the price and yield performance, before fees and expenses, of 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.

The ETF is dividend weighted annually to reflect the proportionate share of the aggregate cash dividends each component company is projected to pay in the coming year, based on the most recently declared dividend per share. In layman’s terms, DLN eschews weighting by dividend increase or yield, the latter of which can lead investors toward stocks vulnerable to dividend cuts.

“Inflation uncertainty has been lurking for several months. The economy is reopening at the same time as stimulus checks have been sent out, plus talk of trillions in infrastructure spending. All these factors point toward an economy heating up,” notes WisdomTree analyst Matt Wagner.

DLN 1 Year Total Return

Duck Inflationary Pressures with ‘DLN’

Dividend growth not only fosters added income and returns, but can also act as an inflation-fighting tool. Since the early 1970s, when inflation ran as high as 11% per year, aggregate annual dividends of the S&P 500 have grown.

Dividend growth as a means of trumping inflation could and arguably should serve to highlight the advantages of the ETFs that focus on dividend growth stocks. That group is comprised of well-established ETFs that emphasize dividend increase streaks as well as unique funds that look for sectors chock-full of stocks that have the potential to be future sources of dividend growth.

See also: Top 17 Inflation-Protected Bonds ETFs

“But for investors with a greater risk tolerance and/or longer time horizons, equity income may be a more attractive inflation hedge,” adds Wagner. “Since 1957, dividends have grown by an average of 5.7% per year—more than 2% above the rate of inflation. This was true during high-inflation periods (the ’70s and ’80s), when inflation averaged more than 6%. It’s also been true during low-inflation periods, such as the last three decades.”

DLN is buoyed by not only low interest rates and inflationary pressures, but what’s becoming a rising tide of payout improvement.

“Net indicated dividend rate change increased $18.0 billion, compared to $9.5 billion in Q4 2020, -$2.3 billion in Q3 2020, -$42.5 billion in Q2 2020, and -$5.5 billion in Q1 2020,” according to S&P Dow Jones Indices.

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