Investors should buy these 3 low-cost dividend-rich funds to maximize their returns when inflation rages and earnings from other parts of the stock market dry up, says Morningstar’s global ETF research director.


  • Dividend stocks hedge against inflation and provide stable income during a recession.
  • Morningstar’s Ben Johnson recommended investors consider buying three cheap dividend ETFs.
  • All three “aim to either maximize dividend durability or dividend yield, or to balance both.”

Unusual market volatility and looming recession fears have wreaked havoc on Wall Street of late.

Oil prices have propelled pump prices to stratospheric highs, fueled by the ongoing Russo-Ukrainian crisis and skyrocketing demand for summer travel. And investors looking for some relief from record-high inflation after April’s optimistic slowdown were just another disappointment last Friday when inflation data for May showed an 8.6% year-on-year rise, another high in four decades .

As stocks, bonds, and cryptocurrencies slumped in 2022, Wall Street analysts began recommending looking at another tool in investors’ arsenals: dividends.

“Amid macroeconomic uncertainty, our interviews with management focused on optimizing spending priorities,” Goldman Sachs analyst David Kostin wrote in a June 6 note. primarily for buybacks and dividends.”

Dividend stocks become increasingly attractive during recessions because they offer investors a steady stream of income — and stocks with ever-growing dividends can also serve as excellent inflation hedges.

Dividend stocks underperformed until late last year, but they’re already starting to prove their worth, said Credit Suisse analyst Andrew Garthwaite.

In a May 27 note, Garthwaite pointed out that so-called “dividend aristocrats” — companies with a track record of annual dividend increases — in Europe are now outperforming the US market by 20%. However, as the manufacturing sector tightens, he believes dividend stocks will continue to rise, having historically outperformed when the purchasing managers’ index fell.

3 low-cost dividend ETFs to consider

While investors can buy dividend shares individually, ETFs — or exchange-traded funds — offer not only exposure to the theme, but also built-in portfolio diversification that inherently reduces volatility. In a June 9 analysis, Morningstar’s director of global ETF research, Ben Johnson, advised investors to consider three “excellent” dividend ETFs.

“The three ETFs have several things in common: they are cheap; monitor reasonably constructed indices that aim to maximize either dividend durability or dividend yield, or attempt to balance both; and are backed by companies that stand behind the investors. , “He explained.

Johnson recommended at the beginning Vanguard Dividend Appreciation ETF (vig)which he noted had outperformed the Morningstar US Markets Index by 5 percentage points to date.

According to Johnson, VIG only considers US stocks that have increased their dividends in each of the last 10 years. In another attempt to “evade the potential value trap,” he said the fund will also remove 25% of the top-yielding stocks. The remaining companies are then weighted by their mobility-adjusted market capitalization.

“The review of sustainable and growing dividends brings a robust portfolio of industry titans such as Microsoft (MSFT), UnitedHealth Group (UNH) and Johnson & Johnson (JNJ),” he stated. “The stability of the franchises it invests in means it’s better able to withstand challenging markets and lag during the rally.”

However, Johnson added a warning: “Investors in this portfolio could forego current dividend yields in hopes of above-average future dividend growth.”

The second ETF on Johnson’s list was Schwab US Dividend Equity ETF (SCHD)who he believes oversees the benchmark stock index that has not only paid dividends for the past 10 years, but has the potential to continue paying dividends. To date, the index has outperformed the Morningstar US Markets Index – while the first index fell 18.2% over the year, the SCHD fell just 5.2%.

SCHD favors higher-yielding stocks, which can inherently increase risk, because high-yielding stocks often come with undesirable characteristics, such as deteriorating fundamentals or falling share prices, Johnson explained.

“Fortunately, the fund’s base requirements usually protect it from problems,” he said. “The addition of a yield pin gives SCHD a falling value, which has benefited investors over the past few months as markets have declined and value stocks have shown relative resilience.”

Finally, Johnson recommended Vanguard International High Dividend Yield Index (VYMI)which he believes offers investors international diversification along with dividend exposure.

“VYMI strikes a favorable balance between pursuing high-dividend stocks and managing the risks involved by leaning toward larger, more stable companies that should provide some downside protection,” Johnson said.

Like SCHD, VYMI selects high yield stocks across a range of large and mid-cap currencies, excluding REITs. Johnson cited examples of large and profitable dividend companies such as Roche (RHHBY), Toyota (TM) and Shell (RYDAF) in VYMI.

With VYMI’s preference for higher yields, investors can once again benefit from the propensity to value stocks at the expense of higher risk. Fortunately, like SCHD, VYMI is proactive in reducing risk exposure, Johnson said.

“Having half of the dividend-paying world in your portfolio diversifies stock-specific risks and reduces the impact of troubled companies,” he said. “VYMI also weights components by their market capitalization, an approach that emphasizes larger and more stable companies that should be able to continue paying dividends.”



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