Kevin Simpson is navigating this inflationary environment by targeting companies that use free cash flow to raise dividends. The founder and chief investment officer at Capital Wealth Management manages the Amplify CWP Enhanced Dividend Income ETF (DIVO) , which has a five-star rating from Morningstar. The large cap dividend growth portfolio is down 6.9% this year, handily surpassing the S & P 500,and places it in the top quartile of performance among its peers. Simpson attributes the outperformance to the firm’s strategy. DIVO includes roughly 25 to 30 large-cap, blue chip stocks that have a history of raising dividends and, more importantly, increasing earnings to support those dividends, according to the portfolio manager. Simpson also protects the portfolio by writing covered calls to hedge against market volatility. “Markets don’t always go straight up, stock prices don’t always go up, and when you have periods of a market downturn, or range bound markets, or a flat market, being compensated through dividends is really very powerful,” Simpson said. “And having companies that are increasing those dividends makes it all the more easy to be an investor in a good company when the economy might not be firing on all cylinders.” The importance of dividends For investors, dividends can help protect portfolios during periods of price volatility, an important consideration at a time when Wall Street is finding it way through the highest inflation in 40 years and an aggressive rate hiking campaign from the Federal Reserve that could tip the economy into a recession. Historically, dividends have counted for roughly one-third of the total return in the S & P 500 since 1945 , according to CFRA chief investment strategist Sam Stovall. Simpson said he is interested in stocks such as Devon Energy that are raising dividends for shareholders using free cash flow, in addition to a more usual fixed dividend. Devon Energy said earlier in 2022 that it’s earmarking up to half its free cash flow to return to shareholders. “If you were to take the potential for 50%, or up to 50% of free cash flow, and add that variable dividend to the fixed dividend, it’s highly likely that their dividend yield could be anywhere between 7% and 9%,” Simpson said. “And that’s with a company that’s generating lots of cash. And whether the price of oil is at $65 or $95, they’re doing an incredibly robust business.” Devon Energy has a dividend yield of 6.2%, according to FactSet data. The stock is up more than 70% this year. Other energy companies, including Chevron , have helped DIVO outperform. The exchange traded fund has a 6% allocation to Chevron alone, making it the top holding, according to Morningstar. Chevron is up more than 47% in 2022. It has a 3.3% dividend yield. “When you invest in the stock market the way we do, you don’t have to call bottoms,” Simpson said. “We want to practice the philosophy that we want to lose as little as possible.”
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