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Inflation in the United States came in hotter than expected in February as costs for gasoline, shelter, airfare and car insurance rose. The Consumer Price Index grew at an annual rate of 3.2% in February, marginally up from a 3.1% increase in January. Economists also expected an increase of 3.1%.
Excluding volatile food and energy costs, so-called core prices rose 0.4% from the last month, unchanged from January's increase. Core prices were up 3.8% year over year, marginally down from January's 3.9% annual gain. The hot data did little to skew investors' outlook for rate cuts to come in the middle of this year, injecting bullishness in the stock market.
Last week, the Federal Reserve Chair Jerome Powell told a U.S. Senate committee that the central bank is “not far" from being confident that inflation is declining toward the 2% target, which would make rate cuts possible. The comment has bolstered investor expectations for the first rate cut in June. Powell noted that inflation had “eased substantially” since hitting a 40-year high in 2022 but that policymakers still needed “greater confidence” in its continued decline before cutting rates (read: S&P 500 Soars to New Highs: 5 Best Stocks YTD).
In such a 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 the same 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.
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 On
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 an AUM of $77.6 billion and an average daily volume of 1.1 million 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 holds 215 stocks in its basket and charges 6 bps in annual fees. It 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 $53.2 billion in its asset base while trading in volumes of 1.1 million shares a day on average. Vanguard High Dividend Yield ETF holds 450 stocks in its basket and charges 6 bps in annual fees. It has a Zacks ETF Rank #2.
iShares Core Dividend Growth ETF provides exposure to 420 companies having a history of sustained dividend growth by tracking the Morningstar US Dividend Growth Index. It has AUM of $26.5 billion and trades in solid volumes of about 2 million shares. DGRO charges 8 bps in fees per year and has a Zacks ETF Rank #1 (read: Is it the Right Time to Invest in Growth ETFs?).
With AUM of $20.6 billion and an average daily volume of 430,000 shares, SPDR S&P Dividend ETF provides a well-diversified 136 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.
ProShares S&P 500 Aristocrats ETF provides exposure exclusively to 67 high-quality companies that have not just paid dividends but have raised them in at least 25 consecutive years, with most doing so for 40 years or more. It follows the S&P 500 Dividend Aristocrats Index and holds 67 securities in its basket. ProShares S&P 500 Aristocrats ETF has amassed $12 billion in its asset base and trades in an average daily volume of 577,000 shares. It has an expense ratio of 0.35% and a Zacks ETF Rank #2.
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Dividend ETFs to Consider Amid Hot Inflation Data
Inflation in the United States came in hotter than expected in February as costs for gasoline, shelter, airfare and car insurance rose. The Consumer Price Index grew at an annual rate of 3.2% in February, marginally up from a 3.1% increase in January. Economists also expected an increase of 3.1%.
Excluding volatile food and energy costs, so-called core prices rose 0.4% from the last month, unchanged from January's increase. Core prices were up 3.8% year over year, marginally down from January's 3.9% annual gain. The hot data did little to skew investors' outlook for rate cuts to come in the middle of this year, injecting bullishness in the stock market.
Last week, the Federal Reserve Chair Jerome Powell told a U.S. Senate committee that the central bank is “not far" from being confident that inflation is declining toward the 2% target, which would make rate cuts possible. The comment has bolstered investor expectations for the first rate cut in June. Powell noted that inflation had “eased substantially” since hitting a 40-year high in 2022 but that policymakers still needed “greater confidence” in its continued decline before cutting rates (read: S&P 500 Soars to New Highs: 5 Best Stocks YTD).
In such a 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 the same 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.
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 On
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 an AUM of $77.6 billion and an average daily volume of 1.1 million 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 holds 215 stocks in its basket and charges 6 bps in annual fees. It 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 $53.2 billion in its asset base while trading in volumes of 1.1 million shares a day on average. Vanguard High Dividend Yield ETF holds 450 stocks in its basket and charges 6 bps in annual fees. It has a Zacks ETF Rank #2.
iShares Core Dividend Growth ETF (DGRO - Free Report)
iShares Core Dividend Growth ETF provides exposure to 420 companies having a history of sustained dividend growth by tracking the Morningstar US Dividend Growth Index. It has AUM of $26.5 billion and trades in solid volumes of about 2 million shares. DGRO charges 8 bps in fees per year and has a Zacks ETF Rank #1 (read: Is it the Right Time to Invest in Growth ETFs?).
SPDR S&P Dividend ETF (SDY - Free Report)
With AUM of $20.6 billion and an average daily volume of 430,000 shares, SPDR S&P Dividend ETF provides a well-diversified 136 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.
ProShares S&P 500 Aristocrats ETF (NOBL - Free Report)
ProShares S&P 500 Aristocrats ETF provides exposure exclusively to 67 high-quality companies that have not just paid dividends but have raised them in at least 25 consecutive years, with most doing so for 40 years or more. It follows the S&P 500 Dividend Aristocrats Index and holds 67 securities in its basket. ProShares S&P 500 Aristocrats ETF has amassed $12 billion in its asset base and trades in an average daily volume of 577,000 shares. It has an expense ratio of 0.35% and a Zacks ETF Rank #2.