The July reading of the Consumer Price Index was 8.5%, and while that’s obviously a notable decline from the 9.1% rate seen in the prior month, the fact remains that inflation resides at uncomfortably high levels in the U.S.
Investors have options for fighting inflation that extend beyond Treasury Inflation-Protection Securities (TIPS). Fortunately, those options don’t require ventures into exotic corners of financial markets. Rather, dividend growth stocks and exchange traded funds can help investors survive and thrive when inflationary pressures are intense.
Enter the VanEck Morningstar Durable Dividend ETF (DURA). DURA’s underlying index — the Morningstar U.S. Dividend Valuation Index — is designed to present investors with a basket of high-dividend stocks. However, many of those names are also steady growers of payouts, which is meaningful for market participants evaluating inflation-fighting ideas.
“With inflation being a major issue in the current economy, consumers are increasingly looking for ways to combat their loss of purchasing power,” noted S&P Dow Jones Indices. “One way to achieve this is to have sources of income that keep pace with, or even exceed, the inflation rate. Over the past four decades, dividends have played an increasing role as a source of income, growing from just 2.88% of all income in December 1981 to 6.25% of all income in March 2022.”
DURA is home to 81 stocks and has serious inflation-fighting and dividend growth capabilities, as highlighted by a combined 44.1% weight to the consumer staples and healthcare sectors. While DURA’s index looks for stocks with high yields, the ETF’s weight to the high yielding utilities and energy sectors is just 11.4%.
The important point is that many of DURA’s member firms have established track records of dividend increases, some spanning multiple decades. That highlights the ETF’s potential utility against a high inflation backdrop.
“During inflationary periods, history has shown the importance of focusing on companies that have consistently increased dividends. A company’s ability to consistently increase dividends may signal a quality company that is able to continually generate increasing cash flows as well as high returns on capital,” added S&P Dow Jones.
Another perk offered by DURA is that many companies with favorable dividend growth track records also have superior return on equity (ROE) relative to non-payout growth competitors. Companies with poor returns on invested capital are among the most vulnerable to persistent, rising inflation.
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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.