Inflation is a topic that is on everyone’s minds. Protecting your wealth against inflation is an important part of a well-rounded financial plan. Even a persistent low level of inflation is enough to significantly cut your purchasing power over time. History shows that the best way to build wealth and protect against inflation in the long run is to buy high-quality dividend-paying stocks.
What is a dividend?
When you buy shares of a stock, you are purchasing a share of ownership in the business. As a business owner, it’s reasonable to expect the businesses you own to produce profits, and to return a portion of those profits to you. Historically, dividends are the primary way publicly traded companies pass their profits on to shareholders. You can also think of dividends as the paycheck you receive as the owner of a business.
Dividends vs Inflation
Over the past sixty years, the growth of dividends has beaten inflation by a wide margin.
Since 1960, inflation has increased the overall level of prices by a factor about 9.2x. In other words, things you could buy for $100 in 1960, would have cost about $920 in 2020.
Over that same period, the dividends paid by dividend-paying S&P 500 companies have increased by a factor of 28.6x. If you owned a portfolio of dividend-paying S&P 500 stocks that paid you $100 per year in 1960, your portfolio would have paid you $2,860 per year in 2020.
Even during the worst decade of inflation in the past century, dividends held their own.
During the 1970’s, the overall level of prices rose 87.11%. The dividend payout of S&P 500 companies rose 87.15%. If you owned high quality dividend-paying stocks, your paycheck kept pace with inflation during the tough times. When times were good and inflation was lower, dividends grew even faster.
Whether inflation is high or low, any amount of inflation reduces what you can buy with your savings. Having a plan to handle inflation is an important part of achieving and maintaining financial independence. Wise investors know that high-quality dividend-paying stocks are the best way to protect wealth against inflation in the long run.
Matthew A Treskovich | CFA, CPA/PFS, CITP, CMA, CFP®, AEP®, MBA, CLU, ChFC
Chief Investment Officer