Protection site

This dog has an inflation protection bite

Oith inflation firmly entrenched in the current economic environment, investors are evaluating strategies that offer protection against soaring consumer prices.

A solid way to get this protection is through dividend stocks and related exchange-traded funds, including the ALPS Sector Dividend Dogs ETF (SDOG). Up 3.28% year-to-date as the S&P 500 is down more than 4%, SDOG is proving its inflation-fighting abilities, but there’s more to the story, and this is good news for investors.

“Dividend-paying stocks have always been an effective means of protecting capital against inflation. In addition to the stock price appreciation that occurs during periods of inflation, companies also tend to increase their dividend distributions. This trend continued in 2021 when aggregate U.S. dividend payments rose 6.5% while the consumer price index (CPI) stood at 4.7%,” according to IHS Markit research.

When it comes to revenue, SDOG has the goods. The ALPS fund currently has a dividend yield of 3.22%, nearly 200 basis points higher than the S&P 500 and well above the yield found on 10-year Treasury bills.

SDOG’s equally weighted sector strategy is also significant in the current climate, as some groups are better able to exert pricing power than broader, cap-weighted market funds, and SDOG allocates weightings important to some of these sectors, including consumer staples.

“If a firm changes the price of its good and consumer demand is unaffected, its product is said to be demand inelastic. Agribusiness firms have shown that they belong to this category and have used their fixing power prices to maintain their margins,” adds Markit.

Two other points in SDOG’s favor are forecasts calling for robust domestic dividend growth this year, and the fact that the ALPS fund has low exposure to groups that could end up being dividend disappointments.

“Apart from automakers, airline operators and a few others, we do not expect inflation to impact broader dividend payments in the near term in 2022. A rising tide is raising all concerns. ships and most industries were able to stay afloat. We expect total U.S. dividend payments to rise 8% in 2022 to an impressive $670 billion. That said, inflation generally does not subside quietly and there are significant downside risks over the medium term,” concludes Markit.

Other high-dividend ETFs include SPDR S&P Dividend ETF (SDY)the iShares Select Dividend ETF (NYSEArca: DVY)and the iShares Core High Dividend (HDV) ETF.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.