The US inflation rate reached 7.5% last month, hitting a 40-year high thatâ€™s nearly four times higher than the average inflation rate of the past decade. Facing higher-priced items in nearly every sector of the economy while simultaneously experiencing a lack of parallel increases in income leaves everyone with a dollar that doesnâ€™t afford them what it used to; not even close. At the same time, the Federal Reserve is expected to begin raising interest rates in March as the first in a string of rate hikes intended to slow lending. While the higher interest rates seek to address the issue of rising inflation, the two forces together make borrowing and spending more expensive. These rapid rate increases are necessitating a reshuffling of assets in the market as increasingly more valuation-conscious people seek investment opportunities they can count on.
While the bond market has long been a steady and reliable place to park cash, this new inflationary period is a worst case scenario for bonds. Higher inflation will lead to higher interest rates and declining bond prices, which is particularly concerning for bonds with the longest cash flows. Investors typically interested in the relative calm of the bond market are now left with few alternative places to invest that still provide value and security. To funnel their capital into more productive markets, investors this year have already pulled $160 billion from money-market funds and $17.5 billion from bond mutual funds and exchange-traded funds. Much of that capital is being diverted into stock funds. While the stock market is not currently inspiring the utmost confidence in investors as an attractive growth opportunity, certain types of stocks offer a satisfactory balance of safety and valuation for those leaving the bond market out of necessity.
Enter dividends. Every quarter, many large publicly-traded companies pay a percentage of their net profits back to investors in the form of dividends. While not every company pays dividends and even fewer pay consistent and significant dividends, there are those that provide a steady stream of income to their shareholders. The consistency of dividends already makes them an attractive alternative to bonds; whatâ€™s even more alluring in this rising rate environment is that dividends also tend to grow over time, offering inflation protection. Risk-averse, valuation-conscious investors are taking notice â€” the dividend market has already generated $13 billion so far this year.
If diverting funds from bonds to dividends in response to a temporary market swing sounds like a knee-jerk reaction that will need to be undone when rates decline, itâ€™s not. Dividends not only make capital work harder in the current environment, but they can also be a better long-term investment strategy when inflation eventually declines in the future, as it is projected to throughout 2022, albeit slowly.
When deciding which dividends to invest in, remember, not all dividend funds are created equal; some offer more consistent payments than others while all vary in long- and short-term risk level. TrueSharesâ€™ DIVZ ETF emphasizes lower volatility and higher dividends than the overall market by acquiring a concentrated portfolio of 25 to 35 favorably valued companies. Portfolio managers tend toward more traditional companies with market capitalizations greater than $8 billion, stable revenue streams, and more disciplined capital reinvestment. This dividend portfolio is a smart alternative for investors formerly interested in bonds as it offers an opportunity to divert investments into a relatively safe stock, with the added bonus of access to capital appreciation.