If you’ve followed this series for some time, you know I’m a dividend guy.
I discuss companies that pay their investors through dividends for several reasons.
They benefit portfolios in calm markets, but they can also help through rough times.
In today’s Investing With Charles, Research Analyst Matt Clark and I dive into using dividend-paying stocks to offset inflation.
Watch our latest video below or keep scrolling for highlights.
How Dividends Help You Fight Inflation
Matt: Today, we talk about two topics that aren’t necessarily related: inflation and dividends.
We hear about inflation in financial news and mainstream media all the time now.
But the question I have for you today revolves around dividends.
Is there a way to use dividend-paying stocks to help upend the rise in inflation?
Charles: Absolutely.
Matt: OK.
Charles: That’s the answer.
Matt: Can you expand?
Charles: Let’s start at the beginning: What is inflation?
Inflation is a rise in prices, aka your expenses. When your expenses rise, you need your income to rise or you will fall behind.
Dividends can help if you focus on companies that raise their payouts and have a good history of raising them.
I’ll give one good example: Microsoft Corp. (Nasdaq: MSFT).
Dividend Stock Workhorse No. 1: Microsoft
Charles: Microsoft is not a company you would think of as a dividend stock. Yes, it pays a dividend. It’s paid dividends since 2003, but it’s never been a super high-yielding company.
But Microsoft has been one of the dividend-raising workhorses over the last going on 20 years here. It has raised that dividend like clockwork — and by a good amount.
Charles: It has raised that dividend by about 10% per year on average. Some years a bit more, some years a bit less, but it's about 10%.
We have inflation at 9% right now.
You're not getting far ahead of inflation on that.
But I believe that 9% inflation will not be with us forever. This is a temporary blip.
I think normal inflation will be a bit higher than what the Fed wants, which is 2%.
The average we should expect for the next couple years might be something like 4% or 5%.
But if you get a stock like Microsoft in your portfolio, it should cover inflation and some.
It’s not a super high-yielder, but the dividend growth keeps you ahead of inflation.
Matt: If you look at 2010, Microsoft paid an annual dividend of $0.52 per share.
In 2022, that dividend is expected to be about $2.48 per share.
Charles: Matt, one more point is that Microsoft may not be a super high-yielder today — it yields a little less than 1%.
But if you're looking at dividend growth, we touched on the concept of yield on cost a few weeks ago.
That is an important idea to come back to here.
Whatever you're starting at, whatever price you lock in today, if it raises that dividend by 10% a year, you're looking at a pretty darn good yield on your original cost after a couple of years.
Dividend Stock Workhorse No. 2: Realty Income
Matt: Microsoft is not alone.
There are a lot of dividend payers out there.
I know you have a favorite. And that is Realty Income Corp. (NYSE: O), a REIT (real estate investment trust).
And this is a company you are madly in love with.
Talk about that a little bit.
Charles: Yeah. My feelings for this stock are such that my wife gets jealous.
I'm sort of joking. I love Realty Income for multiple reasons.
Find out more about these reasons by watching today's video.
Where to Find Us
Coming up this week, Matt will have more on his latest episode of The Stock Power Podcast, so stay tuned.
Don't forget to check out our restructured Ask Us Anything video series, where Adam, Matt and I answer your investing questions.
You can also catch Matt every week on his Marijuana Market Update. If you are into cannabis investing, you don’t want to miss his weekly insights.
Remember, you can email my team and me at Feedback@MoneyandMarkets.com — or leave a comment on YouTube. We love to hear from you! We may even feature your question or comment in a future edition of Investing With Charles.
To safe profits,
Charles Sizemore, Co-Editor, Green Zone Fortunes
Charles Sizemore is the co-editor of Green Zone Fortunes and specializes in income and retirement topics. He is also a frequent guest on CNBC, Bloomberg and Fox Business.