The Federal Reserve, as expected, kept interest rates steady at a 23-year high in the range of 5.25% to 5.5%, citing a “lack of further progress” on inflation. Powell, in his policy statement, reiterated that it will now take longer than expected for the Fed to reach the confidence that inflation is moving sustainably down to 2%. This indicates that rate cuts are not in the cards anytime soon.

Powell noted that high prices have eased "substantially," and the job market has continued to “hold up.” However, with the economy showing signs of slowdown and inflation fears growing once again, it looks like the Fed's fight will continue for a longer period, setting the stage for a period of extended higher rates. Markets are now pricing in a 67% chance that the Fed will only cut rates once or twice in 2024, according to the CME FedWatch tool. The odds of a Fed rate hike in June are less than 1%.

The world's biggest economy started 2024 on a weak note due to lower consumer and government spending amid growing inflation. The economy expanded at the slowest pace in two years, with GDP rising 1.6% annually in the first quarter. The growth reflects a clear slowdown from the 3.4% increase in the fourth quarter of 2023, which was the weakest growth rate since mid-2022 and was also much lower than 4.9% reported in the year-ago quarter. The Federal Reserve’s preferred inflation gauge, the personal consumption expenditures (“PCE”) price index, grew at an annualized rate of 3.4% in the first quarter, nearly double the 1.8% pace logged during the fourth quarter (read: GDP Growth Slows in Q1: 5 ETFs to Invest In).

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 (read: 5 ETF Zones to Keep Your Money Safe Amid Market Volatility).

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), promising outperformance amid the current market conditions.

Vanguard Dividend Appreciation ETF (VIG Quick QuoteVIG - Free Report)

Vanguard Dividend Appreciation ETF is the largest and the most popular ETF in the dividend space, with an AUM of $76.4 billion and an average daily volume of 816,000 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 holds 340 stocks in its basket and charges 6 bps in annual fees. It has a Zacks ETF Rank #1.

Vanguard High Dividend Yield ETF (VYM Quick QuoteVYM - 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 $53.4 billion in its asset base while trading in volumes of 1 million shares a day on average. Vanguard High Dividend Yield ETF holds 557 stocks in its basket and charges 6 bps in annual fees. It has a Zacks ETF Rank #2 (read: 5 Dividend ETFs to Buy as Market Volatility Rises).

iShares Core Dividend Growth ETF (DGRO Quick QuoteDGRO - Free Report)

iShares Core Dividend Growth ETF provides exposure to 419 companies having a history of sustained dividend growth by tracking the Morningstar US Dividend Growth Index. It has AUM of $26.8 billion and trades in solid volumes of about 1.4 million shares. DGRO charges 8 bps in fees per year and has a Zacks ETF Rank #1.

SPDR S&P Dividend ETF (SDY Quick QuoteSDY - Free Report)

With AUM of $20.3 billion and an average daily volume of 310,000 shares, SPDR S&P Dividend ETF provides a well-diversified 135 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 Quick QuoteNOBL - Free Report)

ProShares S&P 500 Aristocrats ETF provides exposure exclusively to 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 462,000 shares. It has an expense ratio of 0.35% and a Zacks ETF Rank #2.