In Rough Market Environment, Case for Dividends Emerges

It’s not unreasonable that market participants are feeling as though nothing is working among equities, and that scenario is amplified by the fact that bond yields are soaring. Dividend stocks and the related exchange traded funds, including the SmartETFs Dividend Builder ETF (DIVS), could be the way for investors to survive these tumultuous times.

To be fair, the actively managed DIVS isn’t higher on a year-to-date basis, but it is proving that there are benefits to active management and dividends, as the fund is outpacing the S&P 500 by 600 basis points as of the start of 2022.

For income investors, that’s a point to ponder because the nearly four-decade bond bull market that investors were treated to from the mid-1980s until the start of the previous decade is over. The Federal Reserve is raising interest rates, and there’s rising speculation that the central bank’s next meeting could result in a rate hike of 75 basis points — as much as the prior two increases combined.

Additionally, some market observers are noting that the Fed, in its efforts to cool inflation, could unleash more rate increases than previously expected. In other words, it’s a potentially perilous time for income investors to depend on Treasuries.

Then there’s the matter of inflation. As investors by now know, the May reading of the Consumer Price Index (CPI) was 8.6% — worse than expected. However, plenty of experts and market observers are highlighting price increases across a variety of categories that are well in excess of 8.6%. High inflation underscores the potency of dividend growth — the very strategy DIVS focuses on.

“One alternative that has emerged as a potential source of regular and progressively increasing income is dividend-paying equities. Equity dividends have provided inflation protection over the medium to long term, with dividend growth surpassing the inflation rate historically,” noted S&P Dow Jones Indices.

The quality approach that DIVS employs is important because it suggests that the fund’s managers can possibly identify the best sources of reliable dividend growth. That’s a relevant trait because dividend growth can beat inflation over longer holding periods.

“Taking a closer look at the S&P 500®, dividends paid out by index constituents rose from USD 140.1 billion in 2000 to USD 511.5 billion in 2021, corresponding to an increase by a factor of 3.7x and a compound annual growth rate of 6.4%. The rise in consumer prices, on the other hand, averaged just 2.3% over the same period,” concluded S&P.

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