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Dividends Offer Decent Protection Against Inflation
Posted on | June 24, 2011 | Comments Off on Dividends Offer Decent Protection Against Inflation
Gold, silver and precious metals are obvious choices for protecting your financial assets from inflation. Precious metals basically hedge your cash against losing value. Hopefully if your purchasing power is eroding on your cash, the increased value in your gold holdings compensates and you make out ok.
With regards to stocks, dividend stocks are indeed a logical choice for some degree of inflation hedging. Now this works out on a more long-term perspective, but on a short term timeline, stocks can be hurt from inflation. The reason is higher costs can often shrink profit margins and profitability and have an adverse impact on the stock price.
To find dividend stocks that will hedge against inflation sufficiently, you have to consider the underlying business. Do the stocks have a product that consumers will buy basically at any price (to a certain degree)? An example of this might be Philip Morris International (PM). Does the company sell products cheaper than anyone, allowing them to pass through inflation to the consumer but still maintain customers? I’d say Walmart (WMT) and McDonald’s (MCD) are in this category.
Another interesting category is somebody like Microsoft (MSFT). They are able to generate massive profits with minimal capital expenditures. While their talent costs may rise, they are not buying a commodity and thus not getting hit with higher input costs as much. Software requires people to build it and that’s about it. As inflation picks up, Microsoft should be able to continue to raise prices of its products assuming that these products are innovative and still in demand.
Increasing dividend payments will help offset inflation as well as companies are able to pass on inflation to their end users and consumers. That is only one part of the equation however for you as the investor. You will need to reinvest that money appropriately to continue to protect yourself.