We use cookies to understand how you use our site and to improve your experience. This includes personalizing content and advertising. To learn more, click here. By continuing to use our site, you accept our use of cookies, revised Privacy Policy and Terms of Service.
You are being directed to ZacksTrade, a division of LBMZ Securities and licensed broker-dealer. ZacksTrade and Zacks.com are separate companies. The web link between the two companies is not a solicitation or offer to invest in a particular security or type of security. ZacksTrade does not endorse or adopt any particular investment strategy, any analyst opinion/rating/report or any approach to evaluating individual securities.
If you wish to go to ZacksTrade, click OK. If you do not, click Cancel.
Fed Pauses Rate Hike, View Hawkish: Dividend ETFs to Bet On
Read MoreHide Full Article
The Federal Reserve, as expected, kept interest rates steady at a range of 5% to 5.25%, marking a pause after 10 consecutive rate hikes. Economic activity has continued to expand at a modest pace, with job gains being robust in recent months and the unemployment rate remaining low. The U.S. banking system is also deemed to be sound and resilient.
The Fed’s decision to stand pat is set to provide a reprieve to consumers who have been hit with steady increases in rates for credit cards, adjustable-rate mortgages and other loans. Tighter credit conditions for households and businesses are expected to affect economic activity, hiring and inflation. As such, the rate hike pause allows the Fed to gather more data and assess the impact of previous rate hikes on the economy before making further adjustments (read: 5 Sector ETFs Soaring to New 52-Week High).
However, future rate increases are still on the table, with the Fed signaling two more quarter percentage point moves before the year-end as inflation remains still above the Fed’s target range of 2%. According to the central bank’s projections, the Fed could raise interest rates as high as 5.6% by the end of 2023.
Eighteen members of the Federal Open Market Committee indicated their expectations for rates in 2023. Four members saw one more rate increase this year and nine expect two. Two more members added a third hike, while one saw four more. Only two members signaled that they don’t see more hikes this year. Meanwhile, investors anticipate a 61.5% chance of the Federal Reserve hiking rates by a quarter point at its Jul 25-26 meeting, per the latest date from the CME FedWatch Tool.
Amid a still-hawkish Federal Reserve scenario, dividend investing seems to be a viable strategy for several reasons:
Income Generation: One of the primary benefits of dividend investing is the steady stream of income generated through dividend payouts. Even if the market is volatile due to uncertainties around the Fed's future actions, dividend-paying stocks can provide a consistent income stream. This can be particularly beneficial in a low-interest-rate environment where the yield on other income investments like bonds may be relatively low.
Potential for Dividend Growth: Companies with a strong history of dividend growth may continue to increase their dividends over time, which can help offset the impact of rising interest rates. These are typically established, profitable companies that have the financial flexibility to increase dividends even during economic downturns. Their ability to grow dividends can be a sign of financial health, which might provide some level of protection in an uncertain market.
Defensive Nature: Dividend-paying stocks are often found in sectors considered "defensive," such as utilities, consumer staples, and healthcare. These sectors can hold up better during economic downturns as they produce essential goods and services that are in demand regardless of economic conditions. Therefore, they may provide some level of stability in a portfolio if there are concerns about potential economic impacts from future rate hikes (read: Investors Flocking to Defensive Strategies ETFs: Here's Why).
Compounding Returns: Reinvesting dividends can significantly enhance the power of compounding and can lead to exponential growth over the long term.
Hedge Against Inflation: Dividend-paying stocks can also serve as a hedge against inflation. As the Fed maintains a hawkish stance, one of the concerns is rising inflation. Companies that can pass on increased costs to customers can maintain or even increase their profitability during inflationary periods, which can support their ability to pay dividends.
ETFs to Bet
While there are several funds available in the space, we have highlighted five ETFs that have a solid Zacks Rank #1 (Strong Buy) or 2 (Buy), which promises outperformance amid the current market conditions.
Vanguard Dividend Appreciation ETF is the largest and the most popular ETF in the dividend space, with AUM of $67.6 billion and an average daily volume of 865,000 shares. The fund follows the S&P U.S. Dividend Growers Index, which is composed of stocks of companies that have a record of increasing dividends over time. Vanguard Dividend Appreciation ETF charges 6 bps in annual fees and has a Zacks ETF Rank #1 (read: Buy These 3 Top-Ranked ETFs and Never Sell).
iShares Core Dividend Growth ETF provides exposure to companies having a history of sustained dividend growth by tracking the Morningstar US Dividend Growth Index. It has AUM of $23.3 billion and trades in solid volumes of about 1 million shares. DGRO charges 8 bps in fees per year and has a Zacks ETF Rank #1.
Vanguard High Dividend Yield ETF provides exposure to high-yielding dividend stocks by tracking the FTSE High Dividend Yield Index. It has amassed $48.4 billion in its asset base while trading in volumes of 1.6 million shares a day on average. The expense ratio is 0.06%. VYM has a Zacks ETF Rank #1 (read: 5 Solid Reasons to Bet on High-Dividend ETFs Now).
Schwab U.S. Dividend Equity ETF offers exposure to 104 high-dividend-yielding U.S. companies that have a record of consistent dividend payments supported by fundamental strength based on financial ratios and ample liquidity. This can be easily done by tracking the Dow Jones U.S. Dividend 100 Index. Schwab U.S. Dividend Equity ETF charges 60 bps in annual fees and trades in a solid volume of about 3 million shares a day. Schwab U.S. Dividend Equity ETF has AUM of $46.8 billion and a Zacks ETF Rank #2.
With AUM of $22.1 billion and an average daily volume of 380,000 shares, SPDR S&P Dividend ETF provides a well-diversified exposure to stocks that have been consistently increasing dividends every year for at least 20 years. This can be done by tracking the S&P High Yield Dividend Aristocrats Index. SPDR S&P Dividend ETF charges 35 bps in fees and has a Zacks ETF Rank #2.
See More Zacks Research for These Tickers
Normally $25 each - click below to receive one report FREE:
Image: Bigstock
Fed Pauses Rate Hike, View Hawkish: Dividend ETFs to Bet On
The Federal Reserve, as expected, kept interest rates steady at a range of 5% to 5.25%, marking a pause after 10 consecutive rate hikes. Economic activity has continued to expand at a modest pace, with job gains being robust in recent months and the unemployment rate remaining low. The U.S. banking system is also deemed to be sound and resilient.
The Fed’s decision to stand pat is set to provide a reprieve to consumers who have been hit with steady increases in rates for credit cards, adjustable-rate mortgages and other loans. Tighter credit conditions for households and businesses are expected to affect economic activity, hiring and inflation. As such, the rate hike pause allows the Fed to gather more data and assess the impact of previous rate hikes on the economy before making further adjustments (read: 5 Sector ETFs Soaring to New 52-Week High).
However, future rate increases are still on the table, with the Fed signaling two more quarter percentage point moves before the year-end as inflation remains still above the Fed’s target range of 2%. According to the central bank’s projections, the Fed could raise interest rates as high as 5.6% by the end of 2023.
Eighteen members of the Federal Open Market Committee indicated their expectations for rates in 2023. Four members saw one more rate increase this year and nine expect two. Two more members added a third hike, while one saw four more. Only two members signaled that they don’t see more hikes this year. Meanwhile, investors anticipate a 61.5% chance of the Federal Reserve hiking rates by a quarter point at its Jul 25-26 meeting, per the latest date from the CME FedWatch Tool.
Amid a still-hawkish Federal Reserve scenario, dividend investing seems to be a viable strategy for several reasons:
Income Generation: One of the primary benefits of dividend investing is the steady stream of income generated through dividend payouts. Even if the market is volatile due to uncertainties around the Fed's future actions, dividend-paying stocks can provide a consistent income stream. This can be particularly beneficial in a low-interest-rate environment where the yield on other income investments like bonds may be relatively low.
Potential for Dividend Growth: Companies with a strong history of dividend growth may continue to increase their dividends over time, which can help offset the impact of rising interest rates. These are typically established, profitable companies that have the financial flexibility to increase dividends even during economic downturns. Their ability to grow dividends can be a sign of financial health, which might provide some level of protection in an uncertain market.
Defensive Nature: Dividend-paying stocks are often found in sectors considered "defensive," such as utilities, consumer staples, and healthcare. These sectors can hold up better during economic downturns as they produce essential goods and services that are in demand regardless of economic conditions. Therefore, they may provide some level of stability in a portfolio if there are concerns about potential economic impacts from future rate hikes (read: Investors Flocking to Defensive Strategies ETFs: Here's Why).
Compounding Returns: Reinvesting dividends can significantly enhance the power of compounding and can lead to exponential growth over the long term.
Hedge Against Inflation: Dividend-paying stocks can also serve as a hedge against inflation. As the Fed maintains a hawkish stance, one of the concerns is rising inflation. Companies that can pass on increased costs to customers can maintain or even increase their profitability during inflationary periods, which can support their ability to pay dividends.
ETFs to Bet
While there are several funds available in the space, we have highlighted five ETFs that have a solid Zacks Rank #1 (Strong Buy) or 2 (Buy), which promises outperformance amid the current market conditions.
Vanguard Dividend Appreciation ETF (VIG - Free Report)
Vanguard Dividend Appreciation ETF is the largest and the most popular ETF in the dividend space, with AUM of $67.6 billion and an average daily volume of 865,000 shares. The fund follows the S&P U.S. Dividend Growers Index, which is composed of stocks of companies that have a record of increasing dividends over time. Vanguard Dividend Appreciation ETF charges 6 bps in annual fees and has a Zacks ETF Rank #1 (read: Buy These 3 Top-Ranked ETFs and Never Sell).
iShares Core Dividend Growth ETF (DGRO - Free Report)
iShares Core Dividend Growth ETF provides exposure to companies having a history of sustained dividend growth by tracking the Morningstar US Dividend Growth Index. It has AUM of $23.3 billion and trades in solid volumes of about 1 million shares. DGRO charges 8 bps in fees per year and has a Zacks ETF Rank #1.
Vanguard High Dividend Yield ETF (VYM - Free Report)
Vanguard High Dividend Yield ETF provides exposure to high-yielding dividend stocks by tracking the FTSE High Dividend Yield Index. It has amassed $48.4 billion in its asset base while trading in volumes of 1.6 million shares a day on average. The expense ratio is 0.06%. VYM has a Zacks ETF Rank #1 (read: 5 Solid Reasons to Bet on High-Dividend ETFs Now).
Schwab U.S. Dividend Equity ETF (SCHD - Free Report)
Schwab U.S. Dividend Equity ETF offers exposure to 104 high-dividend-yielding U.S. companies that have a record of consistent dividend payments supported by fundamental strength based on financial ratios and ample liquidity. This can be easily done by tracking the Dow Jones U.S. Dividend 100 Index. Schwab U.S. Dividend Equity ETF charges 60 bps in annual fees and trades in a solid volume of about 3 million shares a day. Schwab U.S. Dividend Equity ETF has AUM of $46.8 billion and a Zacks ETF Rank #2.
SPDR S&P Dividend ETF (SDY - Free Report)
With AUM of $22.1 billion and an average daily volume of 380,000 shares, SPDR S&P Dividend ETF provides a well-diversified exposure to stocks that have been consistently increasing dividends every year for at least 20 years. This can be done by tracking the S&P High Yield Dividend Aristocrats Index. SPDR S&P Dividend ETF charges 35 bps in fees and has a Zacks ETF Rank #2.