Dividend strategies are outperforming the broader market this year, but within that category, high-dividend strategies are really standing out.
That doesn’t mean investors should lose sight of exchange traded funds that focus on payout growth, such as the SmartETFs Dividend Builder ETF (DIVS ). In fact, DIVS is all the more relevant today because history indicates that dividend growth often tops inflation. That’s something to ponder because on Wednesday, the Labor Department said that the June reading of the Consumer Price Index (CPI) was 9.1% — ahead of economists’ forecasts and another new four-decade high.
DIVS is also a meaningful consideration today because some of the other asset classes with inflation-fighting reputations, such as gold, are faltering this year as interest rates rise. That’s a clue to investors to take a broad view of beating inflation when it comes to portfolio construction.
“Again, there is no one-size-fits-all approach, and high inflation will affect portfolios differently. For example, inflation typically has a greater effect on bond-heavy portfolios than stock-heavy ones. So, investors with 80% of their portfolios in stocks probably shouldn’t make any drastic changes to protect against inflation. Bond-heavy investors, however, may consider implementing some inflation-hedging strategies,” wrote Morningstar analyst Margaret Giles.
As experienced investors know, it’s wise to emphasize sectors that possess pricing power when it comes to using equities to beat inflation. Some of those groups include consumer staples and healthcare, which are two of the largest sector exposures in DIVS.
Not coincidentally, consumer staples and healthcare are two of the sectors with the best reputations for long-term dividends, which further solidifies their status and that of DIVS as winning ideas in inflationary times.
“Many companies have the power to raise prices to pass along the burden of higher supply chain costs to their consumers. Other companies aren’t dependent on the cost of raw materials to maintain their profit margins,” added Giles. “But not all companies have that kind of pricing power. Overall, inflation won’t have a uniform impact on the stock market, so it’s important to seek out high-quality companies that can weather the storm
Giles highlights five stocks — three healthcare names and two consumer defensive stocks — that have strong inflation-fighting potential. Two of those names are Swiss pharmaceuticals giant Roche Holdings and European consumer staples behemoth Unilver. Those stocks combine for more than 5% of the DIVS portfolio, according to issuer data.
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