How Dividend Growth Investing Fights Inflation

In almost every single article and video, I extoll the virtues of dividend growth investing. I mean, it’s hard not to be so excited about this. So what’s it all about?

This is a long-term investment strategy whereby you buy and hold shares in world-class businesses that pay reliable, rising dividends. That’s right. Rising dividends.

That word – rising – it’s key, as I’ll explain further. See, inflation is a general rise in the price levels of goods and services in an economy over a period of time.

And the inflation rate is the rate of that change, that growth. As things get more expensive, your purchasing power goes down. A dollar continues to buy less and less goods and services.

It’s a huge problem. But how to fight it? I’ve got you covered. Today, I want to tell you how dividend growth investing can help you fight inflation. Ready? Let’s dig in.

Dividend growth investing helps you to fight inflation through the growth in your passive dividend income. Inflation is omnipresent. There’s no getting away from it. So you need to fight it head on. And not just for a little while, either. For the rest of your life.

Inflation is a long-term problem. Dividend growth investing is a long-term solution.

How does dividend growth investing fight inflation? Well, it uses inflation to its advantage in an ingenious way. Let me explain.

Dividend growth investing turns inflation on its head and makes it work for you.

So wait. Inflation isn’t our enemy? It’s our friend? Well, kinda sorta. See, the very mechanism behind inflation – the rising costs of goods and services – is the same mechanism that allows for much of the rising profits that fund – you guessed it- rising dividends.

Let’s use a simple product as an example that anyone can understand. Take a Big Mac from McDonald’s, for instance.

The Big Mac Value Pack, predecessor of the Extra Value Meal, sold for $2.59 in 1985 [source]. That same Extra Value Meal now sells for over $6.00.

That’s more than double the cost of that particular item inside of my own lifetime. This is inflation at work.

But guess what happened while the price of that Big Mac meal was going up, year after year, like clockwork? The revenue and profit for McDonald’s was also going up, year after year, like clockwork. And while the Big Mac meal was going up, so was everything else they sell – drinks, fries, other burgers, shakes, etc. If the products they’re selling are being priced at a higher level, that naturally means a higher amount of revenue and profit, all else equal. Guess what else has been rising for all of these years, like clockwork?

Yep. The dividend that McDonald’s pays out to its shareholders.

McDonald’s Corp. (MCD) has increased its dividend for 45 consecutive years. That time period stretches through wars, recessions, and even our recent global pandemic. So while the cost of goods and services is going up, so is the dividend from McDonald’s and many other dividend growth stocks. There are hundreds of dividend growth stocks, representing equity in world-class enterprises, that are doing this same thing.

Not only that, but the dividend is growing faster than inflation.

Sure, inflation has had a recent uptick, which is actually by design from the Federal Reserve. But if you look out over the last couple decades, we’re talking about low-single-digit annual inflation. But check this out. McDonald’s has increased its dividend at an annual rate of 8.4% over the last decade. That absolutely crushes inflation. This isn’t only protecting your purchasing power; it’s increasing your purchasing power. And how are they able to do this?

By selling more products to more people at higher prices.

Indeed. Not only does McDonald’s see its revenue, profit, and dividend rise as a natural side effect of inflation inflating the costs of the goods it’s selling, but it’s also selling more of these higher-priced products to more people. It’s a triple threat. More products being sold. Higher prices on those products. And more people buying the products.

McDonald’s is just one example. There are hundreds.

You can look at other consumer products companies like PepsiCo (PEP). A bottle of Pepsi or a bag of chips definitely costs more today than it did 10 years ago. And it’s going to cost more 10 years from now. But all the same, Pepsi will almost certainly be paying a higher dividend 10 years from now, just like it was paying a higher dividend 10 years ago. It’s been increasing its dividend for 49 consecutive years. It’s simply selling more stuff, to more people, at higher prices.

This isn’t just in the consumer space, either. It’s everywhere.

I’ll give you a totally different example. How about American States Water (AWR)? This is a water and electricity utility company that’s been increasing its dividend for 67 consecutive years. How did that happen? Well, the price of its services are higher today than they were 20 or 30 years ago. And they’ll be higher 20 or 30 years from today. Plus, as the global population grows and more people want more goods and services, it’s more potential customers for businesses of all kinds.

And then there’s the hidden advantage within dividend growth investing: pricing power.

That’s right. Truly world-class companies, like McDonald’s, have pricing power. That means the demand for their products and/or services doesn’t decrease when the prices increase. People aren’t going to suddenly stop eating their favorite food because it’s up by 10 cents from last year. So on and so forth for all types of goods and/or services that come from companies with pricing power. This pricing power is commonplace among great businesses with durable competitive advantages such as brand recognition and intellectual property. Pricing power makes dividend growth investing sustainable and reliable. That’s why it’s a long-term solution for the long-term problem that is inflation.

Inflation is the rising tide that lifts all boats. But you’ve gotta be on a boat.

If you don’t want to drown, you’ve gotta be on a boat. And the best boat to be on is a high-quality dividend growth stock. Better yet, get yourself a fleet of boats and build out a portfolio of high-quality dividend growth stocks. Inflation isn’t going anywhere. Complaining about things getting more expensive won’t solve anything. Instead, arm yourself and fight inflation by using it to your advantage. Become a dividend growth investor.

— Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.