• Mark Zil

Are you concerned about inflation? Warren Buffett Favorite Investment Strategy


Over the last year, this index fund has outperformed the S&P 500.



Warren Buffett will give investors advice at Berkshire Hathaway's annual meeting in May 2021. For context, the stock market was soaring at the time, with the S&P 500 up 48 percent in the previous year, fueled by unbridled optimism fueled by stimulus checks, low interest rates, and the reopening of businesses in the aftermath of the pandemic. Buffett's words, on the other hand, were sobering.


According to him, many new investors are essentially gambling. Buffett also stated that index funds were a better option for the average investor than individual stocks. He specifically advised long-term holding of an index fund comprised of a diverse group of US equities.


Of course, the macroeconomic environment today looks very different. The S&P 500 has plummeted due to rampant inflation and rising interest rates, putting the benchmark index in bear market territory. However, inflation hit a new 40-year high in May, suggesting that things may get worse before they get better. The S&P 500 is currently 23 percent off its high, but there have been six bear markets in the last 50 years, with the index falling by more than 45 percent on three occasions.


Following in the footsteps of Warren Buffett, here is one investment strategy that could help your portfolio weather the current downturn.


Only high-quality companies generate enough cash to pay shareholders a dividend that grows over time.

A dividend stock index that is diverse.


During downturns, many dividend stocks outperform the market, particularly those that raise their payouts on a regular basis. The reason for this is straightforward. Only high-quality companies generate enough cash to pay shareholders a dividend that grows over time. If you combine that notion with Buffett's advice, the Vanguard High Dividend Yield ETF (VYM -0.30 percent) appears to be an appealing investment option right now.




The Vanguard High Dividend Yield ETF invests in 443 U.S. stocks across 10 market sectors, with consumer staples, energy, utilities, industrials, and healthcare accounting for 55% of the fund's allocation, all of which outperform in inflationary environments. Another 20% of the fund is allocated to the financial sector, which outperforms in rising interest rate environments. To that end, the Vanguard High Dividend Yield ETF is currently only 14 percent off its high, easily outpacing the S&P 500's 23 percent decline.


It's also worth noting that four of the index fund's top ten holdings are Berkshire Hathaway stocks. Chevron and Bank of America are among them, accounting for 19% of Berkshire's investment portfolio. Even better, the Vanguard High Dividend Yield ETF has a 0.06 percent expense ratio, which means you would pay only $6 on a $10,000 portfolio, and its dividend yield is currently 2.72 percent, which means a $10,000 portfolio would generate $272 in passive income each year.


As a caveat, while the Vanguard High Dividend Yield ETF has significantly outperformed the broader S&P 500 over the past year, especially when dividend payments are considered, the S&P 500 typically outperforms in the long run. Over the last five years, the S&P 500 has generated a total return of 65 percent, while the Vanguard High Dividend Yield ETF has generated a total return of 47 percent.


You can't, however, put a price on peace of mind. If you're concerned about the impact of runaway inflation in your current portfolio, consider starting a position in this index fund. I believe Warren Buffett would appreciate the concept.


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