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Dividend growth stocks are the inflation-neutralizer you’ve been looking for.

The most recent inflation tally from Statistics Canada came in at 4.4 per cent. I keep a list of S&P/TSX 60 index stocks in a Globe Investor watchlist, and, last I checked, there were close to 40 with a five-year dividend growth rate of 4.4 per cent or more.

I wrote about dividend stocks with strong five-year growth rates back in the spring. Now let’s look at some options for finding dividend growth in an exchange-traded fund. TD Securities has issued a report on protecting portfolios against inflation with ETFs, and four dividend growth funds are in the mix:

* Invesco Canadian Dividend Index ETF (PDC-T): Screens for stocks that have increased dividends over the past five years; the management expense ratio is 0.56 per cent and the current yield is 3.8 per cent, according to Globe Investor.

* Vanguard U.S. Dividend Appreciation Index ETF (VGG-T): Screens for stocks that have increased dividends over the past 10 years; the MER is 0.3 per cent, and the yield is 1.1 per cent.

* BMO International Dividend ETF (ZDI-T): Screens for stocks with high three-year dividend growth rates; the MER is 0.44 per cent and the yield is just under 4 per cent.

* iShares Core MSCI Global Quality Dividend Index ETF (XDG-T): Screens for stocks with steady or increasing dividends; the MER is 0.22 per cent and the yield is 3.1 per cent.

A few thoughts for investors evaluating these and other dividend ETFs:

  • Tax: Foreign dividends received in non-registered accounts don’t qualify for the dividend tax credit; foreign dividends may also be subject to a withholding tax (for more here’s a dividend investor’s tax guide).
  • Distributions: Some funds pay monthly, others quarterly. A return of capital may well be a component of the payout.
  • Holdings: The TD Securities report highlights a few stock market sectors for inflation protection using ETFs – energy, materials, real estate and consumer staples. The dividend-growth ETFs mentioned above have widely varying exposure to these sectors. For example, PDC has a 21 per cent energy weighting, compared with 1.3 per cent for XDG.

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