Last Friday’s US inflation figures show that prices have risen faster than at any time in the last 40 years. November inflation figures for the UK are also out soon. If previous trends are anything to go by, prices are likely to be sharply higher. As the same picture emerges around the world, I’m looking at a dividend-paying ETF as a hedge against rising prices.
Looking for protection
I believe that high-dividend-paying shares can be protection against inflation. These companies tend to be steady firms in solid sectors. In an inflationary environment, they could even be able to increase the prices of their goods or services and maintain or increase their dividends more than the rate of inflation.
For my own portfolio, I’ve always liked ETFs (exchange traded funds). These are funds that track an index or sector and can be bought and sold like a share through most online brokers. They allow me to invest in multiple companies in a single fund and are usually low-cost.
One I’m considering
SPDR S&P Global Dividend Aristocrats UCITS ETF (LSE: GBDV) is one fund that’s always on my radar. Its aim is to invest in global high-dividend-yielding companies by following the S&P Global Dividend Aristocrats Quality Income Index. This tracks companies that have over a $1bn market capitalisation and that have sustained or elevated dividends for at least 10 consecutive years. At the same time, the firms must maintain a positive return on equity and cash flows from operations. Such companies should have pricing power in an inflationary environment.
Diversification is always on my mind when investing and this ETF scores well in terms of number of firms, geographical location and industries.
First, there are around 100 companies in this fund. No company has more than a 3% weighting within the ETF. Second, the fund is geographically diverse. US companies make up 45%, but the remaining firms come from all across the world. Finally, it covers a wide variety of industries including banking, utilities and insurance.
This ETF is large at over $700m and has a reasonable ongoing charge. The dividend yield is currently around 3.7%, which is acceptable given the diversity of the ETF.
The outlook
It’s worth me remembering that there are some risks. One that comes to mind is the dividend trap. This is where a dividend isn’t sustainable in the long run because the underlying business isn’t good. I’m also aware there are other alternatives that might provide more protection in the face of inflation, such as gold.
As I see it, demand for oil and gas is pushing up energy bills around the world. Shortages of many goods, because of factory shutdowns due to covid restrictions, are pushing up prices. The rise of the omicron Covid variant is likely to exacerbate things.
On balance, given that inflation is likely to continue to soar next year, I’m seriously contemplating adding this high dividend-paying ETF to my portfolio.
