Dividend strategies to hedge inflation and accrue wealth


Lori Wilking-Przekop, Senior Director of Equity Research, and Frederick M. Schultz, Director of Equity Research — Ameriprise Financial

Senior woman sitting at table looking at laptop

Although monthly inflation readings have decelerated from their spring highs, Ameriprise Chief Economist Russell Price expects elevated inflation rates to persist for the next year or two. The loss of purchasing power is a risk for both retirees and investors saving for retirement. For that reason, an increased allocation to equities with dividend growth may provide a hedge against inflation for some investors, in our opinion.

We also believe that dividend investing has become a larger portion of the benefit to owning equities for wealth accumulation. Investors should focus, in our view, more on total shareholder return rather than simple price appreciation, as it includes dividend income.

 

Dividend primer

Dividends are a cash return on your investment in a stock or bond — payable to you as a shareholder. Dividends are also potential indicators of quality, value and future growth. To enable shareholders to participate in the company’s growth, the board of directors can declare the distribution of dividends from a portion of earnings or free cash flow. Dividends are paid in cash, additional shares or other property, such as shares in a subsidiary spin-off.

Notable risks include:

  • Dividends are not guaranteed and payments can vary over time
  • Dividend stocks tend to be value-based (versus growth stocks)
  • Dividends can be negatively impacted by taxes and inflation

With a rebound in corporate confidence economic activity, S&P Dow Jones Indices anticipates the S&P 500® could achieve a record payout of cash dividends in 2021. Throughout the year, analysts have upwardly revised their outlook for dividend growth. Dividends are expected to rise 5.1% year-over-year in 2021, up from a 3.2% growth rate at the end of 2020, based on FactSet estimates.

 

Strategies

We believe dividend strategies are appropriate for investors with well-diversified portfolios and intermediate to long-term time horizons. We encourage you to consider personalized dividend-investment recommendations from your Ameriprise financial advisor. They understand your financial goals and needs and can factor dividends into your overall investment mix (asset allocation).

The Ameriprise Investment Research Group classifies dividend-paying equities into two segments:

  • High dividend growth companies that typically increase their dividends faster than the overall market
  • High yielding companies that pay out a greater percentage of earnings as dividends, compared to their peers

Dividend growth strategy vs. High yielding dividend strategy table

 

In or near retirement

For individuals in or nearing retirement, high yielding dividend income may be more appropriate. The Consumer Staples, Health Care, Real Estate and Utilities sectors can offer options with yields exceeding the overall S&P 500.

 

Accumulating toward retirement

On the other hand, high dividend growth may be more appropriate for individuals with a longer time horizon. Those in between may consider a combination strategy. In our view, the Information Technology and Financials sectors can offer attractive opportunities for dividend growth.

 

Conclusion

Dividends have the potential to significantly improve total returns and enhance risk-adjusted returns to help mitigate volatility. Dividend growth and income can also potentially neutralize inflation, produce tax shields and take advantage of compounding and reinvestment that is generally not available in other income-producing investments (particularly fixed income).

Our advice remains to seek personalized recommendations from your financial advisor, start small, grow over time and remain in the right dividend strategies. Stay dedicated to quality factors and understand that wealth accumulation takes discipline and patience.

To learn more about dividends, contact your Ameriprise financial advisor for any of the following Investment Research Group publications: