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Dividend payments are headed for a record this year despite a possible recession. How to play it

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The rocky stock market is riddled with uncertainty, from inflation and interest rates to oil prices and corporate earnings. But dividend payments, which are set to hit new records this year, remain one bright spot. Investors looking to play the trend can consider putting their money in a host of specialized exchange-traded funds. “The current working view for S & P 500 dividends continues to be positive, with growth expected, even as the economy slows and interest rates rise,” wrote S & P Global Dow Jones Indices senior index analyst Howard Silverblatt. “For 2022, dividend payments are expected to increase in excess of 10%, which would set a new annual record payment (a potential 11th consecutive year of record payments), and outpace inflation.” Often viewed as a way investors can generate stable income even in a downturn, dividends continue to curry favor among investors seeking safety during this period of heightened market volatility, Silverblatt said. Dividends already hit new records in the second quarter and could notch a new milestone in the third, according to his analysis. During the second quarter, S & P 500 cash dividends rose 14.1% over the year-earlier period, his analysis showed. Meanwhile, the net dividend gain for the 12 months ended June 2022 hit $74.8 billion, nearly double that from a year earlier. Dividend net changes — increases minus decreases — hit $17.6 billion during the second quarter, up from $12.9 billion in the same 2021 period. “The risk-reward tradeoff has significantly changed so far in 2022, as the market turmoil has moved risk- and growth-oriented investors to more secure, less volatile equity dividend producers, as the dividend acts like an anchor, slowing the decline,” Silverblatt said. For investors looking to play the dividend trend, CNBC Pro screened for the top-rated, dividend-focused ETFs according to Morningstar. All three names that made the cut boast five stars and a silver analyst rating from the firm. Here are the names that came up: The Schwab US Dividend Equity ETF , which includes names like PepsiCo and Pfizer, was among the top-rated funds. The ETF includes firms with a 10-year track record of dividend payments, looking at return on equity and cash flow to debt ratios, among other financial measures. iShares Core Dividend Growth ETF also made the list. The fund, down 12.8% this year, searches for companies that pay out 75% less than earnings and maintain five consecutive years of dividend growth. Microsoft and Apple are among the top holdings. Another fund that made the cut was the SPDR S & P Dividend ETF (SDY). It boasts the highest expense ratio of the group at 0.35%, and includes a number of REITs while overweighting financials. SDY, which is off 6.8% in 2022, screens for companies that have increased dividends over 20 years and mirrors the performance of the S & P High Yield Dividend Aristocrats Index, before fees and expenses.

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