Among dividend-focused exchange traded funds this year, high-dividend strategies are leading the way. In many cases, these ETFs are sharply outperforming the broader market and/or generating positive returns.
High-yielding dividends stocks are attractive at a time when lower-risk segments of the bond market are faltering at the hands of rising interest rates, but experienced equity income investors know that dividend growth matters, too. That advice is particularly relevant for market participants who take the long view of dividends, which they should be doing.
Another reason that dividend growth strategies merit consideration today is that over long holding periods, stocks with solid track records of consistently raising payouts have provided investors with credible inflation-fighting avenues.
“With inflation being a major issue in the current economy, consumers are increasingly looking for ways to combat their loss of purchasing power,” according to 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.”
While the July reading of the Consumer Price Index (CPI) was 8.5%, down from 9.1% the prior month, inflation still resides around 40-year highs — an uncomfortable level by any metric. That places added emphasis on assets that can provide inflation protection.
“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.
Equity income investors may not want to wait too long before embracing dividend growth strategies because payouts are slated to rise over the near term.
“Forecasts for stocks in the core Dividend Forecasting universe are generated by analysts using fundamental research, market announcements and unique quantitative insight. Over the next four quarters, forecasted dividend growth is expected to remain robust, at 6.7% year-over-year. The forecasted growth rate for the following four quarters (Q3 2023 to Q2 2024) is 7.4% year-over-year,” concluded S&P.
Actively managed ETFs with exposure to the dividend growth theme include the T. Rowe Price Blue Chip Growth ETF (TCHP ), the T. Rowe Price Dividend Growth ETF (TDVG ), and the T. Rowe Price Equity Income ETF (TEQI ).
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