Dividend Growth or High Yield: The Income Investor's Bet

Summary

Key PointsHot April PPI data and Kevin Warsh's confirmation as Federal Reserve chairman created uncertainty about the interest rate outlook on May 13.SCHD offers the highest current yield at approximately 3.3% and the strongest one-year return of over 20%, making it a balanced option regardless of Fed action.The right dividend ETF among VYM, DGRO, and SCHD depends on when investors expect the Federal Reserve to cut interest rates. On May 13, the market got two important, and potentially conflicting, data points regarding inflation. Before the market opened, the April Producer Price Index (PPI) came in hot. This wasn’t totally unexpected due to high energy prices, but the market initially sold off on the news. However, later in the day, Kevin Warsh was confirmed as the new Federal Reserve chairman. Nobody knows how much influence Warsh will have over interest rates. But Warsh is committed to changing the way the institution operates, which includes looking at data beyond the current “if A, do B” approach. Together, those data points created a split-screen moment. That is, hot inflation data is pulling rates higher, while a new Fed chair introduced fresh uncertainty about the rate path. Growth investors can mostly look through interest rates, but for income investors (i.e., retirees), rates matter a lot. If the Federal Reserve cuts interest rates, investors would want to lock in higher rates now. On the other hand, if rates stay the same, or even move higher, investors will want to bet on dividend growers that can keep their total return ahead of inflation. VYM – Profit From the “Stay the Course” ChoiceThe Fed’s likely course of action for the next few meetings will be to do nothing. However, by October, the CME Group puts the odds for a rate cut at nearly 20%. By December, that goes to nearly 30%. Even if cuts don't materialize until late in the year, locking in today's yields before any move downward is a smart defensive choice. That makes the case for the Vanguard ...