Dividend ETFs Look Attractive as Inflation Picks Up in June


Inflation in the United States accelerated in June, indicating the early impact of new tariffs. The Consumer Price Index grew 2.7% year over year, up from the 2.4% increase in May and marking the highest level at the fastest pace since February. Month over month, inflation climbed 0.3%, up from a 0.1% rise the previous month.

Tariffs imposed under President Donald Trump are raising the cost of everyday goods such as clothing, furniture and appliances, according to government data. Excluding volatile food and energy costs, so-called core prices ticked up to 2.9%, a slight increase from 2.8%.

The inflation uptick coincides with sweeping tariffs enacted by the Trump administration: a blanket 10% levy on all imports, 50% duties on steel and aluminum, 30% on Chinese goods, and 25% on imported automobiles. Trump has also threatened to impose a new 30% tariff on European Union imports starting Aug.1. These tariffs are trickling down to consumer prices. Gasoline price rose 1% from May to June, grocery prices climbed 0.35%, and appliance prices increased for the third consecutive month.

Several major companies, including Walmart, Nike and Mitsubishi, have acknowledged passing higher costs onto consumers. Some firms delayed price hikes earlier this year by stockpiling inventory, but that buffer is now diminishing.

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 trade and the Fed uncertainties, 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 (read: Best-Performing Dividend ETFs of 1H).

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.



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