How to beat inflation with growing dividends

Retirees are often advised to avoid risk by buying government bonds and holding them to maturity. But this exposes retirees to the risk of losing purchasing power due to inflation. Here are 27 stocks that raise their dividends each year so you can offset this risk.

Dividend_Stocks The usual advice to retirees is to buy ‘safe’ fixed-income investments. Those who give this advice argue that stocks expose retirees to excessive risk. They say government bonds held to maturity eliminate all risk. In our view, these advisors overlook a big risk facing retirees: the ongoing loss of purchasing power due to inflation.

This brings to mind the case of the mother of a friend. After the premature death of her husband in the early 1950s, our friend’s mother collected on his life insurance policy and was advised to avoid all risk and buy government bonds.

As inflation rose in the 1970s and 1980s, however, our friend’s mother found it harder and harder to make ends meet. Ultimately, our friend and her brother had to help support their impoverished mother. In the attempt to avoid all risk, our friend’s mother had underestimated the risk that rising prices posed to her standard of living.

You’ll likely face inflation of 3.1 per cent

A study supports this anecdote. It found that inflation has averaged 3.1 per cent since 1926. This period included many changes: deflation (falling prices) in the depression of the 1930s, government-controlled prices in World War II, low inflation in the 1950s and 1960s, rising and high inflation in the 1970s and 1980s followed by declining inflation. In short, this period covered any condition we’re likely to see in the future.

Inflation of 3.1 per cent will cut your purchasing power in half in 23 years. With longer life expectancy, many people these days live more than 23 years after retiring. And we expect inflation to rise in the years ahead (see below). This suggests you should take steps to protect yourself from inflation when you retire. Except for real-return bonds (which pay inflation-adjusted interest and principal), bonds offer you little protection.

Many of our Key stocks raise their dividends faster than inflation. Consider Royal Bank of Canada. In 2013, it paid a dividend of $2.53 a share. This year it’s set to pay $3.76 a share. But the banks now often raise their dividends more than once a year. Even if it doesn’t pay more, Royal Bank has raised its dividend at an average yearly compound growth rate of 8.2 per cent since 2013. That’s far ahead of inflation.

These Key stocks can beat inflation

‘Very Conservative’ Canadian Key stocks that have raised their dividends in each of the past five years include Alimentation Couche-Tard, Atco, Bank of Montreal, Bank of Nova Scotia, BCE, CN Railway, Canadian Tire, Canadian Utilities, Canadian Imperial Bank of Commerce, C.I. Financial, Emera, Enbridge, Fortis, Imperial Oil, Loblaw Companies, Manulife Financial, Metro, Open Text, Royal Bank of Canada, Saputo, SNC-Lavalin Group, Suncor Energy, Telus, Thomson Reuters, Toronto-Dominion Bank, TransCanada, and Transcontinental.

Legendary investor Peter Lynch argues that dividends plus some capital gains can initially pay just as much as bonds. Then, within a few years, rising dividends will exceed the interest the investor would’ve earned from bonds.

In the year to March 31, Canada’s inflation rate was 1.4 per cent. But some factors could push up inflation. One is loose fiscal policies that have put huge amounts of money into the global economy.

Also, the big baby-boom generation will spend more than it earns when it retires. Inflation became a problem in the 1970s and 1980s when then-young boomers spent more than they earned, borrowing money to buy bigger houses, more cars, lots of trips and so on. Rising demand by legions of retired boomers could raise prices.

Then, too, competition will increase for natural resources. Populous countries in Asia—especially China and India—are certain to need more resources. This could force up resource prices.

You should protect your purchasing power by buying companies that regularly raise your dividends—even more so when you’re retired.

This is an edited version of an article that was originally published for subscribers in the May 4, 2018, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.

The Investment Reporter, MPL Communications Inc.
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