Posts Tagged ‘Inflation’

You Need Dividends During Inflation

Friday, October 8th, 2021


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,


Is Inflation Transitory?

Thursday, June 3rd, 2021

What are the odds that the Fed is correct?

Below is a graph that I saw on an investment site I watch. It struck me that the current level of bond yields for the current level of inflation are so outside the norm and divergent from the mean that either the Federal Reserve is correct and the inflation we are seeing now is a temporary blip up OR we have investors betting on a big return based upon a low probability bet that could end very badly.

If you play the casino game craps, you know that it is all probability-based. You are betting that a number is or is not rolled before the number seven is rolled (seven being the number with the most combinations of the numbers on the dice – one and six, two and five, three and four, four and three, five and two, six and one – making it the highest probability of being rolled. The high probability bets are on the six and the eight since they have the second highest number of combinations. one less than seven. The odds are higher that you will win with a six and an eight, so your winnings are less when they hit. The big money is made betting on two, three, eleven and twelve as the combinations are limited so the odds that they are rolled before a seven are much smaller.

When I look at the chart above, the current plot point shown in red and labeled as such is so far from the mean (as represented by the red line) that its like betting on two or twelve, which are known as the sucker’s bets since the house’s odds of winning are so high that these are the numbers the house encourages you to bet on.

There is an economic concept called Yield Curve Control. Yield Curve Control is a process by which the Federal Reserve buys so many bonds with longer maturities that it keeps yields from rising – it’s simply our old friend supply and demand coming into play. The Fed provides more demand than the required supply so the treasury has no need to issue bonds at higher yields to fund the government. Since the 2008-2009 financial crisis, the Fed has been buying bonds as a way to increase the money supply and thereby stimulate the economy (we’ve written about this Quantitative Easing process on the blog in the past).

So what happens if the artificial demand from the Fed slows down? We can look back to 2013 because the Fed tried to do exactly that thing and it caused them a problem that has become known at the Taper Tantrum in the bond markets. The ten year treasury bond yield roughly double over a three month period in Spring 2013 when the Fed began to slow its purchases of bonds – ie., the demand dropped below the supply required to fund the government so the yield had to rise to entice people to buy the bonds. Before any major damage was done to the economy from the abrupt rise in yields, they resumed buying bonds at the previous level.

In recent statements from the Federal Reserve, certain members of its board have come out with statements saying that the Fed would need to start tapering in the future to ease up on the monetary stimulus that is helping to fuel the rise in inflation. This week, the Fed announced that they would begin to sell off the corporate bonds they purchased last year during the covid recession. Tapering seems to be real, even if it is beginning slowly with the sale of the small number of corporate bonds they own.

Going back to our craps analogy, in the world of economics and bond yields, it appears that the Federal Reserve is the house and they are encouraging you to buy bonds at low yields by saying that inflation is transitory. The big question is whether the bet to buy a ten-year treasury is betting on the six or betting on the twelve, and whether rolling a seven with inflation being higher for longer hits sooner rather than later.


Investing During Inflation (Part One)

Wednesday, May 5th, 2021

In my last blog post, I provided some details on why prices are on the rise and inflation is becoming an issue. Since then, I’ve been doing some research on which investments perform positively and which perform negatively during inflation.

Below will be a series of graphs I put together that compare the historic performance of various asset classes to the levels of inflation at that time. I’ve have added a linear regression that will help you see the positive or negative relationship between the level of the Consumer Price Index and the returns on that asset class. Please understand that these graphs do not present the data in chronological order.

S&P 500 Index (Large Cap Stocks)

Below are a series of graphs that analyze the correlation between Large Cap Stocks (as represented by the S&P 500 Index) and the Consumer Price Index. The first graph covers the period for which all data is available, 1926 to today:

I know this graph is difficult to read if you are not used to looking at statistical correlations, so let me walk you through it. (1) Qn the left side, you will note that the Y Axis is the return for the S&P 500, going from -50% to +75%. (2) On the bottom, you will note that the X Axis is the level of inflation for various years and ranges from -10% to + 20%. (3) For each annual inflation reading, there is a blue dot that shows the return of the S&P 500 at that level of inflation. (4) The red line through the dots is a linear regression best fit line that helps us visually define whether there is a positive or negative correlation between inflation and stock market returns.

Looking at the red line, you can sort of make out that there is a slightly negative relationship here, meaning that inflation has a slightly negative impact on stock prices over the long term. To confirm this visual analysis, I also calculated the statistical Correlation at -0.00787, so it is definitely a very slight negative correlation.

This is all well and good, but that doesn’t really get to the heart of how stocks perform during periods of significant inflation. To examine that, I isolated the time period of 1965 to 1986, a 21 year span that saw inflation move from 0.97% in 1964 to high of 13.29% in 1979 ( along with other double digit years during this time span) and back to 1.1% in 1986.

Visually, this is a lot easier to conclude that a period of rising and then falling inflation has a negative impact on large cap stock returns. To confirm that, I calculated the statistical Correlation to be -0.260998, a materially larger number than the Correlation of the 1926 to present day calculation.

The above analysis looks at an entire inflationary cycle. Since we are just at the beginning of a new cycle, lets refine the data further and just examine the period of time from 1965 to 1978, where inflation was building prior to its peak.

As we might guess, the visual examination shows the impact is even greater negative as inflation is building. The calculated correlation is even more revealing at -0.560582.

S&P 600 Index (Small Cap Stocks)

From the above, we see that rising inflation has a negative impact on the returns of Large Cap Stocks. However will it have the same impact on Small Cap Stocks. To determine that, I performed the same analysis on the S&P 600 Index. Unfortunately, there is not the same amount of data available for this index as there is for the much wider known S&P 500. Our data starts in 1975 for this analysis, so it doesn’t make sense to analyze the data prior to the 1979 peak in inflation, so we will examine the 1975 to 1986 period, comparable to the second graph above.

We again see the negative correlation between stock market returns and inflation. The calculated Correlation is -0.217613.


Based upon this analysis, the broad stock market is a bad place to be during times of inflation. Given the dominance of index funds and passive investing over the past decade or so and their dominant percentage of investment vehicles in the stock market – over half of all stock market investment is now through index funds – any negative impact on the broad market will have an oversized impact on individual investors.

The beta side of the stock market potentially is in trouble so we, as investment managers, need to rely on alpha to provide acceptable stock market returns and to reduce the risk of loss for clients. Beta is emblematic of the saying “a rising tide lifts all boats.” Many stocks have moved higher over the past decade because they were included in an index, and as money came into index funds, their stock prices went up whether they were a desirable investment or not. That is because the index funds have to mimic the make-up of the index so they have to buy the bad with the good.

Over coming days, I will show you various other analyses of markets, sectors, industries, and investment styles that illustrate which benefit from inflation and which do not. We are at the leading edge of this economic change so I want you all to understand what we are doing and to know how to manage your investments that you do not have with us.

Next up, we will look at the proxies for the growth and value styles of investing, the NASDAQ and the Dow Jones Industrial Average. Until then, keep this fact in mind so that you are sure to read the next post: today the 3-year breakeven inflation rate is 2.82%, the highest level in 15 years while the 10-year breakeven inflation rate is the highest in eight years. The breakeven inflation rate is a signal given by the bond market and has proven to be exceptionally accurate over the years.

Inflation is here, we now need to prepare our investment portfolios accordingly.