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Wall Street has lost all its sheen as inflation worries and geopolitical tensions have been playing foul on the stock market since the start of the second quarter.
The bouts of strong economic data have lowered expectations for rate cuts in the first half of this year. The Federal Reserve, in its latest comments, said that it will take "longer than expected" to achieve the confidence needed to get inflation down to its 2% target. On the other hand, the tensions in the Middle East have intensified after Iran launched a barrage of missiles and drones on Israel, heightening fears of a wider conflict in the volatile region (read: ETF Strategies to Play Hot Inflation Data).
Given the rising volatility, a growing number of investors believe the U.S. economy is headed for a "no landing" scenario, in which inflation doesn't reach the Fed's 2% target, but the economy keeps growing, per the latest Bank of America's Global Fund Manager Survey. About 36% of respondents said they believe the most likely outcome for the global economy in the next 12 months is a "no landing." This is up from 23% a month ago. Meanwhile, about 54% of respondents believe a soft landing — where economic growth slows but not to the point of recession, and inflation returns to its historical average — is the most likely outcome.
In such a scenario, the appeal for dividend-focused ETFs has risen. We have highlighted several reasons why dividend investing seems to be a viable strategy amid the market turmoil.
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: 3 Safe-Haven ETFs to Gain on Middle East Crisis).
Compounding Returns: Reinvesting dividends can significantly enhance the power of compounding and can lead to exponential growth over the long term.
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) and promise outperformance amid the current market conditions.
Vanguard Dividend Appreciation ETF is the largest and the most popular ETF in the dividend space, with an AUM of $75.4 billion and an average daily volume of 871,000 shares. The fund follows the S&P U.S. Dividend Growers Index, which comprises stocks of companies that have a record of increasing dividends over time. Vanguard Dividend Appreciation ETF holds 340 stocks in its basket with well-spread-out exposure across technology, industrials, health care, financials and consumer discretionary.
Vanguard High Dividend Yield ETF provides exposure to high-yielding dividend stocks by tracking the FTSE High Dividend Yield Index. It has amassed $52.3 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.
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 billion and trades in solid volumes of about 1 million shares. DGRO charges 8 bps in fees per year and has a Zacks ETF Rank #1.
With AUM of $20 billion and an average daily volume of 343,000 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 provides exposure exclusively to 67 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 444,000 shares. It has an expense ratio of 0.35% and a Zacks ETF Rank #2.
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5 Dividend ETFs to Buy as Market Volatility Rises
Wall Street has lost all its sheen as inflation worries and geopolitical tensions have been playing foul on the stock market since the start of the second quarter.
The bouts of strong economic data have lowered expectations for rate cuts in the first half of this year. The Federal Reserve, in its latest comments, said that it will take "longer than expected" to achieve the confidence needed to get inflation down to its 2% target. On the other hand, the tensions in the Middle East have intensified after Iran launched a barrage of missiles and drones on Israel, heightening fears of a wider conflict in the volatile region (read: ETF Strategies to Play Hot Inflation Data).
Given the rising volatility, a growing number of investors believe the U.S. economy is headed for a "no landing" scenario, in which inflation doesn't reach the Fed's 2% target, but the economy keeps growing, per the latest Bank of America's Global Fund Manager Survey. About 36% of respondents said they believe the most likely outcome for the global economy in the next 12 months is a "no landing." This is up from 23% a month ago. Meanwhile, about 54% of respondents believe a soft landing — where economic growth slows but not to the point of recession, and inflation returns to its historical average — is the most likely outcome.
In such a scenario, the appeal for dividend-focused ETFs has risen. We have highlighted several reasons why dividend investing seems to be a viable strategy amid the market turmoil.
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: 3 Safe-Haven ETFs to Gain on Middle East Crisis).
Compounding Returns: Reinvesting dividends can significantly enhance the power of compounding and can lead to exponential growth over the long term.
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) and promise outperformance amid the current market conditions.
Vanguard Dividend Appreciation ETF (VIG - Free Report)
Vanguard Dividend Appreciation ETF is the largest and the most popular ETF in the dividend space, with an AUM of $75.4 billion and an average daily volume of 871,000 shares. The fund follows the S&P U.S. Dividend Growers Index, which comprises stocks of companies that have a record of increasing dividends over time. Vanguard Dividend Appreciation ETF holds 340 stocks in its basket with well-spread-out exposure across technology, industrials, health care, financials and consumer discretionary.
Vanguard Dividend Appreciation ETF charges 6 bps in annual fees and has a Zacks ETF Rank #1 (read: 5 ETF Zones to Keep Your Money Safe Amid Market Volatility).
Vanguard High Dividend Yield ETF (VYM - 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 $52.3 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.
iShares Core Dividend Growth ETF (DGRO - 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 billion and trades in solid volumes of about 1 million shares. DGRO charges 8 bps in fees per year and has a Zacks ETF Rank #1.
SPDR S&P Dividend ETF (SDY - Free Report)
With AUM of $20 billion and an average daily volume of 343,000 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 - Free Report)
ProShares S&P 500 Aristocrats ETF provides exposure exclusively to 67 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 444,000 shares. It has an expense ratio of 0.35% and a Zacks ETF Rank #2.