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Inflation, Rate Hikes and Volatility: Defend with Dividend Aristocrats

Market forces continue to provide investors with an opportunity in US and global dividend stocks, as inflation and rising interest rates persist as headwinds for growth stocks. Value stocks may benefit the most from this theme, but Dividend Aristocrats can help investors play the value trade while using the stable dividend focus to help protect against any further market drawdowns.


Senior Smart Beta Strategist

When the Fed Hikes, Dividend Aristocrats Flex

Investors in US and global equities are continuing to experience short-term market shocks. High inflation prints, as measured by the personal consumption expenditures (PCE), have forced the US Federal Reserve (Fed) to pursue an aggressive rate increase policy this year. On 15 June 2022, the Fed announced a 75 basis point increase in the Fed Funds Target Rate. The Fed last increased interest rates by 75 basis points in November 1994, when (then) Fed Chair Alan Greenspan was worried about the economy overheating, but inflation was not as high.

The increase in interest rates affects stock prices by compressing the valuation premium of future earnings. This will often have more of an effect on growth stocks, as they would typically trade at higher price-to-earnings multiples. While the Fed has been clear on its intention to raise interest rates, this policy has benefited the relative performance of value stocks, including Dividend Aristocrats. Similar to the first half of 2015, the last time the Fed engaged in a program to raise interest rates, the S&P High Yield Dividend Aristocrats® Index has outperformed the S&P 500® Index during the first six months of 2022 (see Figure 1).

Figure 1: Dividend Aristocrats Performance Against Fed Funds Rate (Trailing 6-month returns)

Dividend Aristocrats Can Provide Shelter During Market Pullbacks

In addition to providing exposure to the value trade, Dividend Aristocrats can also be quite defensive. Dividend Aristocrats stocks tend to be lower beta, which can offer a degree of protection in periods of quick market drawdowns. Since mid-2015 – six months prior to the Fed engaging in a program to raise rates – the S&P 500® Index has experienced 11 pullbacks of greater than 5% during 30-day periods.1 In 9 of the 11 drawdowns, the SPDR® S&P® U.S. Dividend Aristocrats UCITS ETF (ticker: SPYD) has delivered protection through excess returns (see Figure 2).

The beginning of the pandemic (March 2020) was the only material outlier. This was because growth stocks (e.g. technology and communication services) were seen as the relative safe haven based on the idea that a global lockdown would accelerate structural changes, such as remote working. Even including this negative outlier, the average excess returns of SPYD during all 11 pullbacks is 2.97%.

Figure 2: US Equity Drawdowns Greater than 5% (Since Mid-Rear 2015)

In conclusion, 2022 continues to offer investors an opportunity in US and global dividend stocks, as inflation and rising interest rates persist as headwinds for growth stocks. Value stocks may benefit the most from this theme, but Dividend Aristocrats can help investors play the value trade while using the stable dividend focus to help protect against market drawdowns.

How to play this theme

At SPDR® ETFs, we offer exposures that seek to fully replicate the S&P Dividend Aristocrats® indices such as the SPDR® S&P® U.S. Dividend Aristocrats UCITS ETF and SPDR® S&P® Global Dividend Aristocrats UCITS ETF, each of which also has an ESG version available.

On 22 June 2022, the SPDR® S&P® U.S. Dividend Aristocrats UCITS ETF (Ticker: SPYD GY) became the second SPDR UCITS ETF to gather more than $1 billion of net inflows year to date (the first was the SPDR® Bloomberg SASB U.S. Corporate ESG UCITS ETF). With more than $4 billion in assets under management and a monthly average exchange volume of $44 million, SPYD has the tightest spread among comparable UCITS ETFs with an average spread of 11.76 basis points this year.2

To learn more about these ETFs, and to view full performance histories, please click on the links below to be taken to their fund pages.

SPDR® S&P® U.S. Dividend Aristocrats UCITS ETF

SPDR® S&P® Global Dividend Aristocrats UCITS ETF


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