Turning inflationary into inflation-fighting: a strategic look at how to value dividend-paying stocks and ETFs

Earlier this week, President Trump signed a tax reform bill into law that includes a provision that moves up a scheduled change in the corporate tax rate by one percentage point. The Treasury Department…

Turning inflationary into inflation-fighting: a strategic look at how to value dividend-paying stocks and ETFs

Earlier this week, President Trump signed a tax reform bill into law that includes a provision that moves up a scheduled change in the corporate tax rate by one percentage point. The Treasury Department confirmed the change from 37 percent to 21 percent will take effect on Jan. 1, and other changes to the corporate tax code will go into effect on a staggered schedule over the next decade. The change to the tax rate for individual companies is not expected to take effect until 2022. These anticipated tax hikes, as well as the possible impact of future inflation, could lead investors to look to safer, dividend-paying investments.

“As we see inflation picking up and interest rates rising, dividend paying companies could be a good defensive strategy,” Laura L. Lautz, a senior research analyst at Morningstar, told The New York Times.

In our quarterly Dividend Investing Survey, we found that dividend-paying stocks performed well compared to non-dividend-paying stocks in periods of rising or lower inflation. Dividend-paying stocks outperformed non-dividend-paying stocks when inflation was rising in both 2000 and 2008. However, over the past 12 months, income-paying stocks have fared worse than non-dividend-paying stocks.

The survey surveyed more than 1,500 American investors and highlights several good reasons to choose dividend stocks instead of non-dividend-paying stocks. For example, dividend stocks tend to pay higher dividends over the course of the year than non-dividend-paying stocks. They tend to carry lower risk and have less variability in their value, because they pay more predictable dividends. And investors may find dividends more attractive when inflation is high.

Of course, if inflation becomes an issue in the future, investors may be better off in a tax-advantaged retirement account or an ETF that invests in inflation-linked bonds. These ETFs yield a higher return than dividend-paying stocks — but they carry all the risks of a non-dividend-paying stock. Meanwhile, investors may want to consider diversified funds that hold both dividend and non-dividend-paying stocks. These funds use long-term capital gains and stock splits to minimize volatility in their values.

“For investors who are concerned about rising inflation, it’s important to consider what their portfolio looks like,” Ashley Sandefer, a mutual fund analyst at Morningstar, told Bloomberg.

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