Mark Hulbert: How dividend payments beat inflation

Dividends as protection against fuel markets
Dividend Aristocrats more attractive than government bonds
S&P 500 companies with strong dividends

The war in Ukraine, the sanctions against Russia and the Fed’s tightening monetary policy have recently caused turbulence on the market. Numerous experts are now recommending dividend stocks, for example the analysts at Goldman Sachs recommend 10 dividend stocks as protection against inflation. Jim Cramer also recommends distributions against escalating inflation.

Dividend versus inflation

In times of high inflation, investors should pay more attention to dividends, agrees investment expert Mark Hulbert. Historically, total dividends have consistently outperformed inflation. The expert shows how dividend yields beat inflation.
Dividends are considered boring by both retailers and the media because of their stability, especially since the stock market’s dividend yield was near record lows during the pandemic years. According to Mark Hulbert, it is precisely this boring constant that is attractive: Because in the bear market, companies are reluctant to cut their dividends, as this can have a drastic impact on share prices.

Not just an extreme example

Mark Hulbert uses ExxonMobil as an example of how earnings per share compare to yield. The energy company suffered a slump in profits in the early months of the 2020 pandemic. While ExxonMobil still made $4.88 per share in 2018, it was down $5.25 per share in 2020. However, the dividends have increased year on year: in 2020 the cash dividend was even 6.1 percent higher than in 2018, in 2022 it is 1.2 percent higher than in 2020.
Looking back over the past 80 years, Mark Hulbert documents that earnings per share are ten times more volatile than dividends per share. Dividends also tend to grow faster than inflation. Looking back since 1940, dividend growth has outpaced inflation by an average of 2.4 percentage points. The expert emphasizes that the high inflation-adjusted returns reflect constant growth and cannot be attributed to a few years of success that were long ago.
The US energy sector is outperforming the other sectors in this regard. Compared to the companies in the S&P 500, energy stocks clearly outperformed. Due to the high oil and gas prices, this development will continue in the medium term, but growth in the energy sector is classified as limited in the long term.

Treasury bonds and aristocrats

Dividend stocks also outperform government bonds. The yield on 10-year government bonds has risen to almost three percent, which makes them attractive for traders. In the case of dividend stocks, on the other hand, the yield is not fixed.
The Dividend Aristocrats of the S&P 500, i.e. the companies that pay out increasing dividends over a period of at least 25 years, are particularly suitable for long-term investments. Even in the pandemic years 2020 and 2021, the development of the quarterly distributions remained positive, even if the growth was more moderate than in previous years.
Mark Hulbert calculates how dividend aristocrats resp. Funds that hold these stocks can match total interest payments on government bonds, even if the current yield is below that of 10-year government bonds. This happens when the growth of the stock or ETF outpaces inflation, as it has in the past few years, and the CPI follows the projections of the Cleveland Federal Reserve’s Inflation Expectation Model. The advantage of the Dividend Aristocrats then lies in the nature of the stocks: they are established standard stocks which, in the event of (even only slightly) positive price developments, outperform the yields on government bonds.

Recommended Dividend Stocks

According to Hulbert, these dividend aristocrats of the S&P 500 are recommended for purchase by at least two of the top investment newsletters in his company’s database: the international pharmaceutical company Cardinal Health and IBM, which was able to increase its sales by 8 percent in the first quarter of 2022 and exceeded all expectations, are even recommended by four newsletters. Three recommend the multi-technology group 3M, which recently had to lower its profit outlook due to chemical pollution at its plant in Belgium and a drop in sales in the past quarter.
Two each recommend the pharmaceutical company Abbott Laboratories, the industrial gas manufacturer Air Products & Chemicals, the armaments company General Dynamics, the pharmaceutical and consumer goods company Johnson & Johnson, the medical technology manufacturer Medtronic, the consumer goods group Procter & Gamble, and the investment company T. Rowe Price, the second largest discounter in the US Target and the largest US pharmacy chain Walgreens Boot Alliance.

Editorial office finanzen.net

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