In 2021, dividends roared back from the coronavirus brink with domestic payouts positing record levels of growth.
The feat could repeated again in 2022 and then some, potentially providing support for exchange traded funds, such as the ALPS Sector Dividend Dogs ETF (SDOG ). SDOG, which tracks the S-Network Sector Dividend Dogs Index, provided admirable performance last year, aided by high dividend equities being in style amid low interest rates, among other factors.
While SDOG is a high dividend strategy — the ETF yields 3.21% — it’s also levered to dividend growth. That’s an important trait at a time when some market observers believe that not only will S&P 500 payouts continue growing this year, but that dividends will be even more meaningful drivers of equity market performance. Importantly, S&P 500 earnings growth is supportive of more dividend increases.
“Savita Subramanian anticipates 13% dividend growth this year, double the pace of forecasted EPS growth. Dividend and earnings growth has decoupled since Covid, with dividends lagging earnings by nearly 40%,” according to Bank of America Global Research. “Our equity strategists find that dividends per share (DPS) and earnings per share (EPS) have moved together historically with +7.7%/yr average EPS growth vs. +6.9%/yr average DPS growth since 1946.”
SDOG is a meaningful consideration for income investors for another reason: inflation. Not only does SDOG allocate 10% of its weight to energy, a sector with a track record of rising when inflation soars, but dividend growth historically outpaces the Consumer Price Index (CPI).
“Dividends have grown by 5.6% on an annualized basis since 1950 while inflation has grown at 3.5%,” adds Bank of America. “Even as inflation grew at almost twice its historical average between January 1973 and December 1987 (6.9%), dividends grew faster at 7.1%.”
Not surprisingly, SDOG’s yield grabs the attention of some investors. That’s understandable because the ETF’s yield is more than double that of the S&P 500 and well above what investors earn on 10-year Treasuries. However, there’s more to the story, and it highlights why SDOG is potentially useful for investors today.
“High dividend yield stocks have outperformed the equal-weighted S&P 500 75% of months in Late Cycle regimes since 1990, with an average excess return of 6.7%. Dividend yield has tended to under-perform during Fed tightening cycles, but companies with dividend growth have seen a median return of 5.6%,” notes Bank of America.
Other high-dividend ETFs include the SPDR S&P Dividend ETF (SDY ), the iShares Select Dividend ETF (DVY ), and the iShares Core High Dividend ETF (HDV ).
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