Inflation can erode purchasing power over time, especially in a fixed income investment. Carefully selected dividend stock ETFs, with high yield and dividend growth, can provide a hedge against inflation by generating a rising income stream, and still appreciate in value.
Many epicenter companies in reopening industries, such as banks and other financials, industrials, materials, and oil and gas, are about to increase dividends. High-dividend-yielding stocks with dividend growth can provide a good stream of income and are likely to protect an investor against inflation, if the earnings growth supports rising dividends.
SPYD offers a no-nonsense ETF approach to capture high yields and dividend growth in the U.S. large-cap space. The fund ranks all dividend payers in the S&P 500 by indicated yield and selects the top 80 stocks. SPYD does not include any of the dividend sustainability or quality screens that some peers use. SYPD equally weights its portfolio. The dividend paid by the SPYD in the 1st quarter 2021 was $0.6362 for a trailing 12-month dividend of $1.87 and an annualized 1st quarter 2021 dividend of $2.54 (see Table I).
Companies are expected to increase dividends in a reopening economic environment. Dividend increases can provide excellent protection against inflation. For example, you buy 1000 shares of SPYD at $42 a share, which pays 64 cents a share dividend in the first quarter of 2021, so you stand to collect $640 in quarterly dividend income. Next year, consumer prices increase 3 percent – an item that costs $640 now sells for $660 in 2022. But the SPYD ETF boosts the dividend to 81 cents a share or by 27 percent to $813, which puts you $173 ahead.
Estimation of the SPYD Dividends Based on S&P 500 of Earnings and Dividends
IDC Financial Publishing, Inc. (IDCFP) estimated future quarterly dividend payments for the SPYD, based on the forecast of EPS and dividends per share at a 36% payout ratio. If the dividend growth of SPYD exceeds that of the S&P 500, which could well happen, the investor in SPYD benefits.
Yield vs. Growth
Dividend yield shows the investor how much you stand to collect in income on your investment now ($0.6362 in the 1st quarter 2021 and $2.54 at an annual rate) and dividend growth shows how much the income increases over time. Over one year, IDCFP forecasts the SPYD dividend is expected to increase from its current value of $0.6362 to $0.81, a 27% growth rate, far more than the inflation rate for the 12-month period ending March 2022. The dividend growth rate from March 2022 to March 2023 is forecast at 11.1%. The 11.1% increase in dividends occurs after the economic reopening and recovery, continuing to exceed expected inflation.
Future Target Price and Stock Price Appreciation Potential
Today’s yield on a $2.54 annualized dividend is 6.08%. SPYD sold at an annualized yield of 5.1% on December 30, 2019. A terminal yield of 5.1% on the annualized quarterly dividend of $0.81 for 2022Q1, or $3.24 at an annual rate, provides a target price of $63.53. The appreciation potential from today’s price of $41.81 to $63.53 is 51.9%, plus the 6.08% yield at cost.
A second method of forecasting the target price uses the yield history from the economic recovery years 2017, 2018 and 2019. A 4.5% yield on trailing 12-month dividends is the logical target yield. Using the 4.5% target yield in the future provides various SPYD target prices through 2023Q1 (see Tables III & IV).
SPYD Weighted to Benefit from a Reopening Economy
The SPYD ETF highest-yielding 80 stocks selected from the S&P 500 are equally stock weighted, but benefit from being overweight in sectors such as banks and financials, materials, and oils and gas. The SYPD also benefits from being underweight in technology, healthcare, communication services and consumer sectors (see Table V).
Banks and financials benefit from the reopening reflation trade, with rising loan demand and loan yields, created by higher long-term yields that price inflation and rising TIPs yields. Energy and materials industries benefit from rising prices and demand during a reflation economic recovery. Underweight sectors, such as information technology, healthcare, communication services and consumer related companies, are the higher price-to-earnings sectors, experiencing stock selling, as rotation moves money into epicenter reflation stocks.
SYPD has a low cost of fund management, and the highest appreciation potential and yield.
Risk in the SPYD
The SPYD is structured to outperform in dividend growth and price appreciation in a strong economic recovery which favors epicenter stocks. The risk is a failure to experience an economic recovery from the COVID recession, which appears a relatively low risk at this time. Stock market prices fluctuate in the future with potential stock market corrections in a bull market. The SPYD offers over a 6% yield for patient investors during periods of corrections.
Conflicts of Interest
At the time of publication of this report, IDCFP does not know of, or have reason to know of, any material conflicts of interest. In fact, IDC Financial Publishing, Inc. does not have the same conflicts that traditional sell-side research organizations have because IDCFP (1) does not conduct any investment banking activities, and (2) does not manage any investment funds.
IDC Financial Publishing, Inc. is an independent research company and is not a registered investment advisor and is not acting as a broker-dealer under any federal or state securities laws.
All pricing is as of the market close for securities displayed. Opinions and estimates constitute our judgment as of the date of the material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument, nor does it constitute investment advice or address the suitability of any investment or security. The opinions and projections herein do not take into account individual client circumstances, risk tolerance, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies. The recipient of this report must make its own independent decision regarding any bank analysis mentioned herein.
All research reports are disseminated and available to all clients simultaneously through electronic publication on the IDCFP portal or can be requested by email.
© 2021 IDC Financial Publishing, Inc.
To view all our products and services please visit our website www.idcfp.com.
For more information, or for a copy of this article, please contact us at 800-525-5457 or email@example.com.
John E Rickmeier, CFA, President, firstname.lastname@example.org
Robin Rickmeier, Marketing Director