Inflation is one of the big stories of 2022 That’s true for investors And it’s true for, well, everyone else.
So how do we investors slay the inflation dragon? Well, the first thing is to understand what it is. And then you implement a strategy that beats it. By investing in businesses that are killing it.
Today, I want to tell you about the best long-term investment strategy, and some of the best stocks to consider buying, in this inflationary environment. Ready? Let’s dig in.
The long-term investment strategy you should consider implementing in this inflationary environment is dividend growth investing.
This strategy is all about buying and holding shares in world-class enterprises that pay reliable, rising dividends to shareholders.
And how are those reliable, rising dividends funded? By producing reliable, rising profits. You can’t continuously write checks that cannot be cashed. Certainly can’t continue to write ever-bigger checks. It just doesn’t work. I like to say that dividends are the proof in the profit pudding. And as that pudding pile expands, so should the dividends.
And it’s the growth of the dividends that is critical here. Not just dividends. Growing dividends. This is key.
After all, what is inflation? It refers to a general progressive increase in prices of goods and services in an economy. It’s a rate of change. A rate of growth. It’s, say, the can of soup going from $3.00 to $3.20 YOY. It’s, say, rent going from $1,200/month to $1,300/month in a year. Inflation is measured in percentage terms. As a rate of growth. What else is a rate of growth? Dividend growth, of course.
Here’s the big mistake a lot of new or uninformed investors make. Comparing yield to inflation. That’s wrong.
They see a stock yielding 3% and say that this is a lot lower than the 8.5% YOY inflation rate the US recently printed. Now, let’s remember that one’s personal rate of inflation won’t be exactly 8.5% anyway. If you have fixed mortgage and car payments – two of the biggest monthly bills most people contend with – your personal rate of inflation might be quite a bit lower than 8.5%. Plus, inflation varies by location. But we’ll put that aside.
If this were a correct comparison, all stocks yielding 0% would be practically worthless right now. But we know that’s not true.
Yield is simply a measurement of an annual dividend payout against a stock’s price. You divide the dividend by the price and get yield. But that’s not a rate of change. That’s not a growth rate, like inflation is. Yield is an important number for an investor, sure. Just like EPS is an important number. But yield all by itself has nothing to do with the rate of inflation.
Now, yield is part of the whole package for an investment. It’s part of a stock’s total return, which is what you get when you add all dividends and capital gains received. And annualized total return can certainly be lined up against annualized inflation, which is definitely what you’d be doing with a stock that doesn’t pay any dividend at all. But yield alone cannot be compared to inflation alone.
I’ll explain this using numbers.
Let’s say your portfolio is producing $20,000/year in dividend income. And you’ve hammered your expenses down to $20,000/year. Congratulations. You’ve reached the crossover point – the point at which passive income matches expenses. You’re financially independent. Now, that $20,000/year in dividend income could come about in many different ways.
Maybe it’s a $500,000 portfolio yielding 4%. Maybe it’s a $400,000 portfolio yielding 5%. Or it could be a $666,000 portfolio yielding 3%. So on and so forth. Depends on how you’ve structured your portfolio. But, as you can see, all of these yield numbers are lower than the 8.5% annual inflation rate in the US right now. Again, though, that comparison is wrong.
The rate of dividend growth. The rate of inflation. These are the comparisons to make.
If a dividend growth rate is higher than the rate of inflation, your purchasing power is increasing. And vice versa, of course. Let’s say you’ve got a $666,000 portfolio yielding 3% in order to produce that $20,000/year in dividend income. The lowest yield example of the three I provided.
3% is way lower than 8.5%. This investor must be doomed, right? Wrong.
The 3% yield on its own is pretty much irrelevant here. It’s the rate of dividend growth that’s relevant. Let’s then assume that this portfolio is averaging 9% dividend growth this year. Well, inflation is running at 8.5% YOY. So what happens to this person’s purchasing power, using these numbers? It went up!
Their annual expenses go from $20,000 to $21,700 – an 8.5% YOY increase. But their annual dividend income went from $20,000 to $21,800 – a 9% YOY increase. Their dividend income is growing faster than expenses because the rate of growth for dividend income exceeded the rate of growth of inflation.
How are so many high-quality dividend growth stocks able to increase their dividends at high rates?
Like I said earlier, dividend growth investing is all about investing in world-class businesses. World-class businesses grow at high rates by providing the world with the products and/or services it demands. And the prices at which they provide these products and/or services tends to rise year in and year out, like clockwork, which trickles down to dividends growing year in and year out, like clockwork.
Higher prices, higher revenue, higher profit, higher dividends.
The REIT renting those apartment units is now seeing its rental revenue rise from every unit it rents at a higher rate. If inflation is the general progressive increase in prices of goods and services in an economy, the companies selling goods and services at higher prices are obviously benefiting from it. And so are their shareholders.
How do you slay the inflation dragon?
By investing in the very businesses that are raising their prices and are part of the general progressive increase in prices of goods and services in an economy. You plug directly into inflation and park your boat in a rising tide lifting all boats. Everyone is complaining about higher prices across all goods and services. But these higher prices don’t come from some mystical ether. They come from the very companies we can all invest in, right? Want to benefit from higher prices on food, rent, gas, etc? Okay. Buy shares in the companies that are now charging higher prices for all of this.
I now want to tell you about three dividend growth stocks that are growing their dividends way faster than inflation.
First up is Broadcom (AVGO).
Broadcom is a global semiconductor and infrastructure software products company with a market cap of $239 billion.
Technology is taking over our lives. And that bodes well for the likes of Broadcom. Data centers, software, connectivity, broadband, wireless, etc. There are so many ways in which Broadcom can profit from technology’s tightening grip on all elements of our global society. And profit they have, profit they do. Not only that, but they regularly grow their profit at outstanding rates, which has led to outstanding dividend growth.
Broadcom’s 10-year dividend growth rate is an astounding 43.6%.
Still, that’s way higher than the annual inflation rate. Plus, you even get a nice yield of 2.8% here. And with FCF covering the dividend approximately twice over, the company’s track record of 12 consecutive years of dividend increases looks set to get a lot longer.
Next up, take a look at Domino’s Pizza (DPZ).
Domino’s is a multinational pizza restaurant chain with a market cap of $14 billion.
One thing that’s gone up quite a bit recently? The pricing of all kinds of food. How did that happen? Companies that are part of the global food chain raised their prices, of course. This can actually benefit Domino’s in two big ways, besides the obvious higher absolute sales base and all that comes from that. One, it gives the company cover to raise its prices.
They won’t stand out when everything is going up. Second, higher grocery prices can end up making Domino’s look more attractive as an alternative. When prices go way up, consumers sometimes trade down. Sticker shock at the grocery store can play right into Domino’s hands. And that keeps this dividend growth train chugging along at a high speed.
Domino’s has grown its dividend at a five-year rate of 19.9%.
However, some exposure to businesses growing at this kind of rate can boost the overall dividend growth rate of your entire portfolio. And with the payout ratio at 32.5%, Domino’s looks set to continue increasing the dividend for years to come. They’ve already been doing just that for 10 consecutive years. And I think they’re just getting started.
Last but not least, let’s quickly talk about Tractor Supply (TSCO).
Tractor Supply is a farm and ranch supplies retailer with a market cap of $24 billion.
Tractor Supply is benefiting from a one-two punch right now. On one hand, the pandemic and the related lockdowns resulted in people fleeing cities for suburban and rural locations. That means more potential customers. Second, rising prices.
When the prices of everything, including farm and ranch supplies, goes up, what happens to the revenue over at Tractor Supply? It tends to also go up. Indeed, their Q4 report showed 15.3% YOY sales growth. What does that mean? Higher profits and higher dividends.
This company has a fantastic 10-year dividend growth rate of 25.5%.
But they’re totally missing the point. Tractor Supply has been a rocket when it comes to compounding the business, stock, and dividend at inflation-beating rates. With a payout ratio of 42.7%, the company’s track record of 13 consecutive years of dividend increases is likely only the start of much, much more.
— 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.
The BEST Source of PASSIVE IncomeWould you like to make money while you sleep and wake up to fresh money you didn't work for? Would you like to become financially independent and live off of passive income? Want to know the BEST form of passive income? I'm Jason Fieber, and I went from below broke at age 27 to financially free at 33 by living below my means and building passive income. I now get paid while I sleep, and I wake up to fresh passive income almost every single day. This is money I earn without having to do anything. No job to show up to. No work to do. I get paid for simply existing. Passive income is AWESOME. But not all "passive income" is the same. Some forms of passive income are definitely better than others. In this video, I talk about the BEST form of passive income. If not the best, it's definitely my favorite. After all, I'm able to live an early retirement dream lifestyle because of it!
