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How to Beat Inflation With Dividends

Written by Luke Burgess
Posted November 8, 2018 at 7:00PM

Paying a dividend is the most common way for companies to share profits directly with stockowners.

The first record of a company paying a regular dividend belongs to the Dutch East India Company (VOC).

The VOC paid annual dividends in both cash and spices worth about 18% of the value of its shares for almost 200 years of the company's existence (1602–1800).

Dutch East India Company bond, printed 1622–1623

Of course, modern dividends are mainly paid out in cash, usually through an electronic transfer or, less often today, a paper check.

Every once in a while, you will come across a company that still shares the physical fruits of its labor. An example would be a small gold mining outfit that pays a dividend in physical gold bullion. But this is rare.

Approaches to dividend investing in the 20th century were (and still continue to be) largely influenced by works of Benjamin Graham and David Dodd.

Graham and Dodd, the fathers of value investing, argued that the intrinsic value of a stock can be measured and compared to its market value based on factors such assets, earnings, and dividend payouts.

Seems like a pretty basic idea today. But 100 years ago, this was cutting-edge stuff.

Price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times he will do better if he forgets about the stock market and pays attention to his dividend returns and to the operating results of his companies.

— Benjamin Graham

(For more information on value investing, I highly urge you to read Ben Graham's landmark title The Intelligent Investor. Warren Buffett calls it “by far the best book on investing ever written.”)

Of course, the value-investing paradigm wasn't without critics. It still isn't. The argument of value vs. growth stocks is among the most debated topics on Wall Street.

Value investors continue to promote the magic of compounding dividend returns. And their rivals continue to point to low returns and inherent problems with dividend-yielding equities.

Some investors will still choose to invest only in dividend-producing stocks. Others will completely ignore any dividend an equity might provide.

But we'd like to offer you a different approach to dividend investing today.

It's neither all-in nor all-out. Instead, it's a middle-ground approach of sorts. And we believe it to be among the best ways for most retail investors to take advantage of long-term dividend yields.

The Better Dividend Investor

You have a hole in your boat...

It's not a large hole. But it's big enough that if you don't plug it up somehow, you're going to sink.

This hole is inflation.

And the boat is your wealth.

The purchasing power of your money is slowly being eroded away by inflation (a.k.a. the creation of new money and its introduction into the market).

And unless you're making more money to keep up with the rate of inflation, you're growing poorer by the day — even without spending a dime.

Our approach to better dividend investing helps fix that. It's simple...

Earn enough money through stock dividends to cover losses from inflation.

This is easier than it sounds. The thing about inflation is that it's fairly predictable.

In 2018, the annual inflation rate is expected to average about 2.5%. Over the next five years, analysts expect inflation to lower to around 2.0%.

That means to beat inflation, you only need to make 3% or 4% (taxes considering) in dividends.

That's also a pretty easy task. Although it hovers under 2% right now, the historic average dividend yield from stocks on the S&P 500 is about 4.4%.

Average dividend yields vary by sector. But it isn't difficult to beat inflation just with dividend payments.

Our analysts have successfully used this simple method, applying it to their own expertise.

Cannabis investing expert Jeff Siegel has implemented it into his marijuana portfolio with a cannabis REIT.

And oil guru Keith Kohl has made sure to include many dividend-paying stocks in his energy portfolios specifically to hedge inflation.

Meanwhile, Bubble and Bust Report director Chris DeHaemer has just added high dividend-paying coal companies to his portfolio.

Dividend returns are unlikely to make you rich, even if you invest a significant amount of money. With a 4% annual dividend, you'd need a million-dollar investment just to make $40K a year.

But this little bit of money can plug that hole in your boat.

Of course, there are a few factors you need to consider before setting up your portfolio for this approach, including tax, trading fees, etc. But even if you manage to cover half of your losses from inflation through dividends, you're doing better than most people.

Earn enough money through stock dividends to cover losses from inflation.

Until next time,

Luke Burgess Signature

Luke Burgess

follow basic@Lukemburgess

As an editor at Energy and Capital, Luke’s analysis and market research reach hundreds of thousands of investors every day. Luke is also a contributing editor of Angel Publishing’s Bubble and Bust Report newsletter. There, he helps investors in leveraging the future supply-demand imbalance that he believes could be key to a cyclical upswing in the hard asset markets. For more on Luke, go to his editor’s page.

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