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Dividends and inflation

Posted November 20, 2013 in Advice Column, Grimes

As an investor, you may ask if an allocation to dividend stocks in your retirement portfolio will help keep up with inflation.

Examining stock returns during periods of high inflation may answer this question. Dividend-paying stocks may offer benefits such as stability through income return and inflation protection. While stock prices tend to be volatile, dividends may serve as a stable component of total return and may provide better inflation protection compared with bonds, especially in today’s low interest rate environment. Between 1974 and 1980 (high inflation period), the average rate of inflation was 9.3 percent, much higher than the historical rate of 3 percent. During this time, bonds yielded 7.9 percent from income, but prices declined by 2.7 percent, resulting in a total return of 5.6 percent — way short of inflation. On the contrary, stocks returned a total of 10 percent: 5.0 percent from dividend income and 4.8 percent from price return, outpacing inflation for this time period. With the risk of rates staying lower for a longer period, this can help boost your yield and over all return.

Stocks do have risks, but that risk is lower in the course of time. So if your time frame is years, then adding some less volatile dividend stocks could provide for some needed income to your low yielding income portfolio.  If I can help you determine if this would be suitable for your situation, please come see me at City State Bank or call me at (515)986-2265 to set up a meeting.

Not FDIC insured, not a bank deposit or product, not guaranteed by bank, may lose value and is subject to investment risk including possible loss of principal.

Information provided by Wade Lawrence, City State Bank, 100 N.E. Jacob St., Grimes, 986-2265.

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