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You Need Dividends During Inflation


Earlier in the Summer, I wrote about inflation and why I thought it was likely less transitory than the Federal Reserve was stating. I think we are now seeing even the Federal Reserve acknowledge that inflation will be around for awhile as we see energy, housing, and food costs all heading materially higher.

Because of this, I thought I’d show you the benefit of dividend stocks over bonds that pay interest during times of inflation.

Dividends Grow Annually – Interest Stays the Same

When inflation is rising, that fixed interest payment that you receive on a bond stays the same, yielding you reduced purchasing power from the returns on your investment.

Dividends, on the other hand, generally grow each year as corporate earnings grow. In times of inflation, corporate earnings generally grow faster than previously as companies raise their prices to compensate for the rising costs of production. Managements work hard to keep their profit margins the same or increasing, so if they are successful – and most tend to be – their profits on the increased prices provides increased net income from which increased dividends are paid.

At BankChampaign, we have two primary dividend portfolios – Blue Chip Portfolio which focuses on an equity income strategy and Dividend Income Portfolio which focuses on yield, growth and consistency of dividend payments. The purpose of today’s blog is to discuss the Dividend Income Portfolio.

Below is a grid of the companies that are eligible to be included in the portfolio. The companies either have to have:

  • Dividend Income Consistency – a long history of paying dividends; some have a greater than 100 year history of paying and increasing the dividends paid to their shareholders
  • Dividend Income Growth – a history of raising their dividends by at least 9% per year
  • Dividend Income Yield – a history of paying well above average dividends to their shareholders, with a yield greater than 3%, many with yields above 5%
TickerCompanyDividend HistoryYieldDiv Growth Rate
Dividend Income Consistency Holdings  
CATCaterpillar Inc S&P Dividend Aristocrat (25yrs+) 2.19%9%
GDGeneral Dynamics Corp S&P Dividend Aristocrat (25yrs+) 2.34%8%
GISGeneral Mills Inc Dividend Payor King (100+ yrs) 3.41%3%
HIGThe Hartford Financial Services  Dividend Contender (10-24yrs) 1.96%8%
MCDMcDonald’s Corp S&P Dividend Aristocrat (25yrs+) 2.14%7%
MCYMercury General Corp Dividend Champion (25yrs+) 4.54%0%
MMM3M Co Dividend Growth King (50+ Years) 3.37%2%
MOAltria Group Inc Dividend Growth King (50+ Years) 7.64%4%
NFGNational Fuel Gas Co Dividend Champion (25yrs+) 3.43%2%
PEPPepsiCo Inc S&P Dividend Aristocrat (25yrs+) 2.79%6%
PGProcter & Gamble Co Dividend Payor King (100+ yrs) 2.38%7%
PMPhilip Morris International Inc Dividend Contender (10-24yrs) 5.12%3%
QCOMQualcomm Inc Dividend Contender (10-24yrs) 2.06%2%
RSGRepublic Services Inc Dividend Contender (10-24yrs) 1.45%6%
UNPUnion Pacific Corp Dividend Payor King (100+ yrs) 2.08%5%
VZVerizon Communications Inc Dividend Contender (10-24yrs) 4.65%2%
XOMExxon Mobil Corp Dividend Payor King (100+ yrs) 5.92%1%
Dividend Income Growth  Holdings
AAgilent Technologies Inc Dividend Contender (10-24yrs) 0.48%10%
AAPLApple Inc Dividend Challenger (5-9yrs) 0.60%6%
ABTAbbott Laboratories S&P Dividend Aristocrat (25yrs+) 1.45%13%
ACNAccenture PLC Class A Dividend Contender (10-24yrs) 1.10%10%
AMGNAmgen Inc Dividend Contender (10-24yrs) 3.24%10%
AMTAmerican Tower Corp Dividend Contender (10-24yrs) 1.90%20%
ATVIActivision Blizzard Inc Dividend Contender (10-24yrs) 0.61%11%
AVGOBroadcom Inc Dividend Contender (10-24yrs) 2.97%23%
AWKAmerican Water Works Co Inc Dividend Contender (10-24yrs) 1.36%10%
BACBank of America Corp Dividend Challenger (5-9yrs) 1.77%9%
BMYBristol-Myers Squibb Co Dividend Contender (10-24yrs) 3.31%10%
COPConocoPhillips Dividend Challenger (5-9yrs) 2.54%27%
COSTCostco Wholesale Corp Dividend Contender (10-24yrs) 0.66%11%
CTASCintas Corp S&P Dividend Aristocrat (25yrs+) 1.57%96%
DGDollar General Corp Dividend Challenger (5-9yrs) 0.74%13%
FITBFifth Third Bancorp Dividend Contender (10-24yrs) 2.62%15%
HDThe Home Depot Inc Dividend Contender (10-24yrs) 1.96%10%
LMTLockheed Martin Corp Dividend Contender (10-24yrs) 3.01%9%
VLOValero Energy Corp Dividend Contender (10-24yrs) 5.55%9%
Dividend Income Yield  Holdings
ABBVAbbVie Inc S&P Dividend Aristocrat (25yrs+) 4.71%10%
ADMArcher-Daniels Midland Co S&P Dividend Aristocrat (25yrs+) 2.45%3%
AFLAflac Inc S&P Dividend Aristocrat (25yrs+) 2.44%4%
BXBlackstone Inc Dividend Challenger (5-9yrs) 2.60%-21%
CMICummins Inc Dividend Contender (10-24yrs) 2.45%8%
GILDGilead Sciences Inc Dividend Challenger (5-9yrs) 4.02%8%
GMREGlobal Medical REIT Inc Dividend Challenger (5-9yrs) 5.54%0%
HRBH&R Block Inc Dividend Challenger (5-9yrs) 4.24%0%
JHGJanus Henderson Group PLC Dividend Challenger (5-9yrs) 3.58%0%
KKellogg Co Dividend Contender (10-24yrs) 3.60%1%
KEYKeyCorp Dividend Contender (10-24yrs) 3.42%4%
NEMNewmont Corp Dividend Newbie (<5yrs) 3.78%86%
NTRNutrien Ltd Dividend Challenger (5-9yrs) 2.82%2%
OKEONEOK Inc Dividend Contender (10-24yrs) 6.45%6%
PFEPfizer Inc Dividend Contender (10-24yrs) 3.60%6%
SOSouthern Co Dividend Contender (10-24yrs) 4.20%3%
TAT&T Inc S&P Dividend Aristocrat (25yrs+) 7.70%1%
TFCTruist Financial Corp Dividend Contender (10-24yrs) 3.12%5%
TXTernium SA ADR Dividend Challenger (5-9yrs) 4.96%0%

Not all clients own each of these companies, but as we are constructing portfolios these are generally the companies that are included based upon their relative value and prospects at the time.

Dividends and the Power of Compound Growth

If you happened to own all of these companies in relatively equal dollar amounts, for the first year you would get an average yield of 3.14%. If you wanted to invest up to $2,000 in each company at today’s prices, you would have a portfolio worth just shy of $107,000 and have income that first year of $3,556. Definitely better than owning a bond that is paying you less than 1%, maybe way less.

However, what happens when you get to Year Five of owning this portfolio? Because of the income growth rate (see the last column on the grid above) your income would have grown to $4,484, a 4.20% yield. Definitely better than investing $107,000 in a 1% yielding bond that paid you $1,070 in year one and still pays you $1,070 in year five.

That’s nice, but we really get to see the power of compounding when we get to Year Ten. In year ten, you income would have grown to $6,409, a 6.01% yield. Now we’re talking!

To do an apples to apples comparison, today you can buy a ten year Treasury Bond yielding 1.55%. On your $107,000 investment you would receive $1,658 each year, or a total of $16,580 in income over the ten year life of the bond.

But let’s compare that to our Dividend Income Portfolio: due to the dividend growth rate that compounds our annual dividends, we receive a growing income each year. Over the course of the same ten years that you receive $16,580 from your treasury bond, you would receive $47,701 in dividend income from this same $107,000 stock portfolio. Roughly triple the income for investing the money in stocks instead of bonds.

But There Is More…

Additionally, each of the companies in the portfolio grows over time. For example, the Average Annual Return from Caterpillar stock has been 11% annually over the past ten years. This is comprised of the dividend and the increase in the price of the stock.

On October 11, 2011, the price of a share of Caterpillar stock was $60.91 compared to $195.10 today. The share price of caterpillar stock has tripled in those ten years plus you received $695 in dividends on your $2,000 initial investment.

If you take this and extend it to the entire portfolio, and project the future value based upon the growth rate it has experienced the past ten years, you would not get a realistic number. The fact is we have been in a major bull market the past ten years like we haven’t seen since the 80’s. That is not likely to be repeated.

But why don’t we project that future value based upon 1/2 of the growth rate of the stock and see what the portfolio might theoretically show for a total value at the end of ten years. So, looking at caterpillar, since it had an average total return of 11% per year, if we reduce that by the 2.19% yield and further reduce it by 50%, we still show a value of $2,952, or almost doubling our original $2,000 investment. Still not bad.

In Total

So at the end of ten years, you would have collected $47,701 in dividends and you would have a $107,000 portfolio of stocks that theoretically would grow (based upon the same formula used for Caterpillar above) to $193,665, or almost doubling our original investment.

This gives you total value plus income received on your Dividend Income Portfolio of $241,336 compared to your Treasury Bond of $123,580 ($107,000 Bond return of principal at maturity plus total interest payments of $16,580).

Final Thoughts And Caveats

As you looks at the dividend growth rates in the chart above, you will see some that are unreasonably high and not likely to repeat. Because of this I capped the growth rate in dividends just as I reduced the growth rate in stock price to come up with the projected values above. If the dividend growth rate was between 10% and 20%, I capped it at 10% in the calculation; if the dividend growth rate was greater than 20%, I capped it at 20% in the calculation; if it was below 10%, I used the dividend growth rate as shown in the grid above. For the growth rates that are shown as zero, the companies generally raised their dividends fractionally so they were not mathematically more significant than zero, so zero is what was used in the calculation.

In order to give me some confidence that the companies in the portfolio will continue to pay dividends, you can see that most have been paying and raising their dividends between 10 and 24 years, 25 and 49 years, 50 and 99 years, and over 100 years. This means that during such economic calamities as the Great Depression, the 1929 Stock Market Crash, World Wars One and Two, the 1970’s hyper inflation, Black Monday when the stock market dropped 27% in a single day, 911, the DotCom stock market crash, the SubPrime Loan stock market crash, and the Covid stock market crash, these companies continued to pay and raise their dividends because they were committed to their shareholders and their financial performance allowed them to do so.

That’s not to say those economic calamities were not painful as the value of stock portfolios fell significantly during many of them. But over a long enough time horizon, through sound portfolio management and avoiding panic selling, stocks outperform other classes of marketable investments.

As we are moving into an inflationary economy, don’t fall victim to negative real rates of return (e.g., 1.55% bond yield minus 4% inflation = negative 2.45% real rate of return for a ten year treasury bond) when you can get a nicely positive real rate of return from stocks as long as you hold them long enough, manage them appropriately, and don’t panic during market crashes (e.g., the 14% Average Annual Return over the past ten years for the companies in the Dividend Income Portfolio minus 4% inflation = positive 10% real rate of return – however adjusting that down using the math above, the 14% becomes roughly 8.5% projected Average Annual Return yielding a 4.5% real rate of return).

If you need help navigating an inflationary economy while managing your savings and investments, you can contact me at and we can discuss it.

Thanks for reading,


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