What’s risen faster than inflation? Dividends

• A one-two punch threatening income investors: rising inflation and low interest rates.
• Dividends have historically grown faster than inflation and can help investors outpace inflation.
• ETFs focused on dividend-growth stocks can help income-seeking investors diversify sources of income and seek long-term returns.

The first Big Mac cost 45 cents. Today the classic burger with special sauce costs nearly $6 in the United States.¹

The long-term effects of inflation erode how far you can stretch a dollar, and not just at the drive-thru. For income investors, fast-rising inflation tends to shrink the buying power of bond interest payments, an especially vexing challenge given that interest rates are currently near historic lows.

Bonds of course play an essential role for investors, but ETFs targeting stocks that are poised to grow their dividends can help diversify income and enhance returns over the long term.

Super size me

U.S. Big Mac prices

We get lots of questions from clients about how to reinvigorate income using high-dividend-paying stocks. Many don’t realize that when inflation is rising quickly, dividends have a key advantage compared with bond coupons: potential for growth. Over the past 150 years, dividends paid by U.S. companies have grown 3.7% per year compared with 2% per year for inflation.²

Doubling up

Annualized dividend growth of U.S. stocks vs. inflation, 1871–2021

Over four decades, shares of companies that initiate and grow dividends have outperformed shares of companies that kept dividends the same or paid no dividends. Importantly, dividend-growth stocks have been less sensitive to rising rates compared with bonds, a key consideration with both Canada and U.S. policy interest rates near zero.³

The dividend-growth advantage

Dividend growers & initiators have led non-dividend payers and those with no change to dividends

Companies with resources to grow dividends consistently tend to be profitable, financially sound and well-known. For example, Coca-Cola has grown its annual dividend for more than 30 consecutive years. Among international stocks, food and drink conglomerate Nestle has raised its dividend for 25 years in a row.⁴

The iShares S&P/TSX Canadian Dividend Aristocrats Index ETF (CDZ) provides exposure to large, established Canadian companies that have increased their dividends for at least five consecutive years. Meanwhile, the iShares US Dividend Growers Index ETF CAD-Hedged (CUD) provides exposure to high yielding U.S. stocks that have increased dividends for at least 20 consecutive years.

For investors looking to include additional quality screens, the iShares Core MSCI Canadian Quality Dividend Index ETF (XDIV), the iShares Core MSCI US Quality Dividend Index ETF (XDU), and the iShares Core MSCI Global Quality Dividend Index ETF (XDG) all provide low cost exposure to high quality companies with above average dividend yields that have either held steady or increased over the past 5 years. They do this while avoiding value traps and screening for dividend sustainability.

The prospect of higher inflation at a time when interest rates are historically low make this a challenging market for income investors. iShares dividend-growth stock ETFs can help thread the needle between generating income and growth that can potentially outrun inflation.