Inflation in the United States picked up in January, fueled by higher grocery, gasoline and rent prices. The Consumer Price Index grew 3% year over year in January, marginally up from the 2.9% increase in December 2024 and marking the highest increase since June. The index rose 0.5% over the previous month, the largest monthly increase since August 2023. It also represents a slight acceleration from the 0.4% rise seen in December.
Excluding volatile food and energy costs, so-called core prices rose 0.4% from the last month, up from December's 0.2% monthly gain and represents the largest monthly rise since April 2023. Core prices were up 3.3% year over year, marginally up from 3.2% in December.
Prices for groceries increased 0.3% in December, after rising 0.5% in November. Eggs prices jumped 15.2% from December — the largest increase since June 2015 – and 53% from the year-ago month. Eggs accounted for about two-thirds of the total monthly food-at-home increase. The surge came amid adverse weather conditions and disease outbreaks in livestock. Meanwhile, other breakfast items like orange juice and coffee were also at elevated levels.
The cost of car insurance continues to rise and picked up 2% from December. Used car prices have jumped the most since May 2023. Hotel prices rose 1.4% last month, while the gasoline index rose 1.8% in January, according to AAA data. The housing sector also remains under pressure, with rental costs rising 5.2% year over year. Higher interest rates have slowed down new housing construction, leading to a supply-demand gap.
The hot data has delayed the prospect of interest rate cuts anytime soon. Traders are now pricing just one interest rate cut this year, down from two rate cuts projected earlier (read: Only One Rate Cut Expected in 2025? ETFs to Play).
In such a scenario, dividend investing seems to be a viable strategy for several reasons:
Income Generation: One of the primary benefits of dividend investing is the steady stream of income generated through dividend payouts. Even if the market is volatile due to uncertainties around the Fed's future actions, dividend-paying stocks can provide a consistent income stream.
Potential for Dividend Growth: Companies with a strong history of dividend growth may continue to increase the same over time, which can help offset the impact of rising interest rates. These are typically established, profitable companies that have the financial flexibility to increase dividends even during economic downturns. Their ability to grow dividends can be a sign of financial health, which might provide some level of protection in an uncertain market.
Defensive Nature: Dividend-paying stocks are often found in sectors considered "defensive," such as utilities, consumer staples and healthcare. These sectors can hold up better during economic downturns as they produce essential goods and services that are in demand regardless of economic conditions. Therefore, they may provide some level of stability in a portfolio if there are concerns about potential economic impacts from future rate hikes.
Compounding Returns: Reinvesting dividends can significantly enhance the power of compounding and can lead to exponential growth over the long term.
Hedge Against Inflation: Dividend-paying stocks can also serve as a hedge against inflation. Companies that can pass on increased costs to customers can maintain or even increase their profitability during inflationary periods, which can support their ability to pay dividends.
ETFs to Bet On
While there are several funds available in the space, we have highlighted four ETFs that have a solid Zacks Rank #1 (Strong Buy) or 2 (Buy), which promises outperformance amid the current market conditions.
Vanguard Dividend Appreciation ETF (VIG)
Vanguard Dividend Appreciation ETF is the largest and the most popular ETF in the dividend space, with an AUM of $90 billion and an average daily volume of 1.3 million shares. The fund follows the S&P U.S. Dividend Growers Index, which is composed of stocks of companies that have a record of increasing dividends over time. Vanguard Dividend Appreciation ETF holds 337 stocks in its basket and charges 5 bps in annual fees. It has a Zacks ETF Rank #1 (read: Trade War Heats Up: ETFs to Shield Your Portfolio).
Vanguard High Dividend Yield ETF (VYM)
Vanguard High Dividend Yield ETF provides exposure to high-yielding dividend stocks by tracking the FTSE High Dividend Yield Index. It has amassed $61.6 billion in its asset base while trading in volumes of 1.4 million shares a day on average. Vanguard High Dividend Yield ETF holds 533 stocks in its basket and charges 6 bps in annual fees. It has a Zacks ETF Rank #2.
iShares Core Dividend Growth ETF (DGRO)
iShares Core Dividend Growth ETF provides exposure to 407 companies having a history of sustained dividend growth by tracking the Morningstar US Dividend Growth Index. It has AUM of $31.5 billion and trades in solid volumes of about 2 million shares. DGRO charges 8 bps in fees per year and has a Zacks ETF Rank #2.
SPDR Portfolio S&P 500 High Dividend ETF (SPYD)
SPDR Portfolio S&P 500 High Dividend ETF provides exposure to stocks with a high level of dividend income and the opportunity for capital appreciation by tracking the S&P 500 High Dividend Index. Holding 80 stocks in its basket, the fund has key holdings in real estate, utilities, financials, and consumer staples. SPDR Portfolio S&P 500 High Dividend ETF has AUM of $6.8 billion and trades in an average volume of 959,000 shares. It charges 7 bps in annual fees and has a Zacks ETF Rank #1 (read: Here's Why S&P 500 ETFs Are Soaring: Trump, Earnings & Economy).
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Get it free >>Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports
SPDR Portfolio S&P 500 High Dividend ETF (SPYD): ETF Research Reports
Vanguard High Dividend Yield ETF (VYM): ETF Research Reports
iShares Core Dividend Growth ETF (DGRO): ETF Research Reports
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