Dividend investing simply does not work! With the historical rate of inflation hovering around 3% per year (looking at 1913 – 2013), inflation simply eats away at one’s dividend income (since many stocks I buy pay a starting yield of around 3%). Just kidding! Of course this is not the case. However, I receive this comment all the time, and many people believe this myth. Today’s video looks at dividend growth investing versus inflation and shows why dividend investing works despite inflation.
Today’s investing video gets a bit technical with some specific models. In an effort to make things simple (and based on long-time subscriber request), I’m thrilled to share with you my dividend investing Excel model today. You can download the model and follow along here:
I start out today with a discussion of historical inflation. Personally, I think inflation is more in the 2% range. That said, I am willing to take 3% for the purposes of this video to be conservative.
Next, I dive into several models that show why starting yield doesn’t really matter. It’s all about dividend growth investing (not just dividend investing). The key term here is growth. Yes, starting yields can get cancelled out by inflation (at least partially), but I’m in it for the dividend growth. Most of the companies I own have a track record of raising their dividends each year. And, when one compounds many years of dividend increases, inflation is left in the dust! I’m personally experiencing dividend growth that far outpaces inflation.
Since my modeling is a little conservative, I next transition into some real world examples form my personal portfolio. I show some examples of recent dividend increases that are out of this world. With these types of dividend increases over time, inflation becomes a distant memory in the rear view mirror. Stocks covered include: Starbucks (SBUX), Johnson & Johnson (JNJ), PepsiCo (PEP), Clorox (CLX), and McDonalds (MCD).
Last, I dive into a topic that I think most investors miss. In my opinion, dividend investors (more so than anyone) face the opportunity to decrease expenses. They have the opportunity to experience budget deflation, making the concept of inflation even less significant.
As humans, we tend to place roadblocks. We tend to get scared. In my humble opinion, it’s important to recognize inflation, but I certainly don’t let it stand in the way of my dividend investing strategy. In terms of earning income to pay the bills, it really doesn’t get much better than dividends, in my opinion.
Want to learn more about yield on cost? Here’s my original video on yield on cost that started it all:
Disclosure: I am long Starbucks (SBUX), Johnson & Johnson (JNJ), PepsiCo (PEP), Clorox (CLX), and McDonald (MCD). I own all of these stocks in my stock portfolio.
Disclaimer: I’m not a licensed investment advisor, and PPC Ian videos, Excel files, and content are just for entertainment and fun. PPC Ian videos, Excel files, and content are NOT investment advice. Also, I’m not a tax advisor and PPC Ian videos, Excel files, and content are NOT tax advice. Please talk to your licensed investment advisor before making any financial decisions. Please talk to your licensed tax advisor before making any tax decisions.
All PPC Ian videos, Excel files, and other content are (c) Copyright IJL Productions LLC….(read more)
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Re-visiting this excellent video!
do you believe the government numbers?
I’m 20 right now and I got roughly 40 years to run in the market. I’m wondering if dividend stocks would beat out growth stocks during this time frame.
Warren Buffet and Charlie Munger would disagree.
Can we get an update on this video for the post-Covid 2021 inflation that is expected?
you scared me with that title Ian
I agree with this man 1000% after hearing about the penny doubled and the rice on the chess board
Thanks for all the info on your channel. You have changed my views on investing for sure. I no longer worry much about capital appreciation of stocks, but rather focus on stocks which pay dividends. Beautiful cash flow which more than keeps pace with inflation. Without the headaches and debt of buying rental properties for cash flow, as I'd previously been considering doing.
I also like your philosophy of focusing largely on non-cyclical, consumer product oriented companies, rather than what seems "trendy" at any given time.
Oh yeah…I also loved your point, in this video, of how inflation may not even be a concern in one's latter years anyway. Since most of us will likely lower our overall living expenses later in life, thus experiencing an overall DEFLATION in our monthly living expenses.
Eventually my wife and I will no longer have kids dependent upon us, can downsize into a cheaper living space, spend less on groceries, etc. So, even if inflation is closer to 3% in the future, it probably won't matter that much, in terms of any actual impact on our lifestyle.
Hi Ian. Just wanted to clarify wage growth at 0.2% per year and you said that it just keeping up with inflation? If inflation is 2%/3%, I assume you mean wage grow is 2% instead of 0.2%?
I am at the age that I can withdraw IRA/401K and dont need the income immediately. I hold stock for long. Question: Is it better to use IRA funds to invest in dividend bearing stocks or better to use regular after tax funds. I'm asking because IRA of course delay the tax but when withdrawing use regular income tax rates whereas after holding stock for 1 year the dividends (and selling the stock) are taxed as long term… thanks for your advice
So we need to find good dividend stocks that will continue to raise their dividends. Also we need a lot of capital invested. It's going to take decades to build such a portfolio, but it will pay off in the long run. Buffet's YOC with Coca Cola is insane!
With a bond (fixed yield) the inflation is critical, but NOT with a stock which is growing much more than the inflation, correct Ian…
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I wish I could throw this video in the face of everyone who doubts dividend investing.
I feel like now-a-days everyone wants to get rich quick and doesn’t realize big gains come from investing over the years, not over night.
Get to the point … -_-
Inflation is in fact our friend. Since it also inflates company profits and their ability to pay dividends.
What do you think of companies like AGNC , TWO, and ARCC? These are real estate Investment Trusts. AGNC pays monthly, all of these pay more than 10%, now that we are oversold some are pushing a 12% rate. I do not think they will raise the rate though or that they can. What do you have that pays 17%? I have never seen one that high since 2009. Your discussions are very interesting, keep it up.
That view is dead wrong. Dividend are just one part of an investments total return. A dividend is just one part of a solid company. A bad company is bad dividend or no dividend. It's about great companies with great long term history which also pay out a portion of the profits as a dividend to the owners of the company. Inflation has zero to do with this issue. I am proof they are dead wrong. I had a net worth of over 2 million by the time I was 45 to prove it's wrong and I will not buy stock in any company which does not have positive cash flow and does not pay a dividend .
What's your opinion on dividend ETFs, like DFE, FPE, BAB, FBZ, DEM, DTH, DWIN, PCEF, etc? Are their 4-8% yields sustainable and worth buying on their [current] down-trends?
I've learned quite a lot from your videos Ian! Shout out to you!
I would like to add that the share prices don't rise as dividends rise, but rather share prices tend to follow earnings and the way they grow. Dividends and their growth is just an after effect of those earnings, which companies tend to share with their shareholders. As a result investors shouldn't just pay a close eye on just dividends, but rather pay attention to the earnings.
Ian do you have a website recommendation showing dividend growth percentages per year. I’ve found dividend.com that is decent for seeing the history of the dividend (whether it’s gone up or down or stopped for any period of time).
The more you teach me about YOC the more I love it. Need to stay focused on stocks that grow the dividend that is for sure.
Really glad I dared to click on a movie with this title. Confirming for myself that I don't suffer too hard confirmation bias. Was afraid I had to shatter my vision.
I love the excel sheet!
I don't know why they think it wouldn't work because of inflation. After all you still keep the stocks and values of the dividend stocks grow over time and that's on top of dividends.