Dividends and Inflation

[marko]

Wondering if some of the more astute investment types might provide some insight to an academic question.

Suppose one had X shares of a stock or fund. You bought that stock/fund in, say the 1960's and it paid $500 per year in dividends back then.

Since that time, you've held that stock but still hold the same number of shares because you never reinvested the dividends.

All things being equal relative to that company's performance, would you expect to see a steady $500 dividend or would inflation --or some other mechanism-- allow for those payouts to increase over time? A $500 dividend in the 60's was a lot more money that it is now.

More down to earth, if your current, unreinvested dividends were to cover your expenses, would you expect that those dividends would increase over time to keep up with inflation? If so, what are the drivers that make that happen? Was the old GE paying 1% per share back in the 40's and slowly increased it as inflation helped things along?

Or would one find oneself looking for better yields or find ways to buy more shares every decade or so?

 

[Danmar]

My div growth portfolio grows divs by about 6-8% per year on average for last 20 years. Well ahead of inflation. No reinvestment. Current yield about 3.6%

 

[marko]

My div growth portfolio grows divs by about 6-8% per year on average for last 20 years. Well ahead of inflation. No reinvestment. Current yield about 3.6%

That's what has me wondering. My dividend dollars have remained fairly consistent over the past decade.

As far as I can tell, one of my funds (TRPrice Equity Income Fund PRFDX) was paying .17 cents a quarter in 1984 and is still paying .17 cents now.

 

[Senator]

That's what has me wondering. My dividend dollars have remained fairly consistent over the past decade.

As far as I can tell, one of my funds (TRPrice Equity Income Fund PRFDX) was paying .17 cents a quarter in 1984 and is still paying .17 cents now.

Were there any splits or other share purchases that happened without dividends being reinvested? Did the price go up so you have more value, just less dividends?

Generally, as prices of the shares go up, dividends increase to keep the same % return competitive with inflation. If you had a 10% return in 1984 due to inflation being so high in 1984, it may well be a 2% return now.

 

[marko]

Were there any splits or other share purchases that happened without dividends being reinvested? Did the price go up so you have more value, just less dividends?

Generally, as prices of the shares go up, dividends increase to keep the same % return competitive with inflation. If you had a 10% return in 1984 due to inflation being so high in 1984, it may well be a 2% return now.

That may be the case; I didn't own that fund back then. What I do see is that my $$ have remained the same for the past 10 years however.

As my portfolio has grown over the past five years I have seen my dividend percentage shrink from 2.1 to 1.89 however. Same cash payout, just a lower percentage of the total.

 

[FIRE'd@51]

For the Vanguard S&P 500 index fund (VFIAX) the annual dividend per share was 1.34 in 2001. In 2016 it was 4.17. That's an annual increase of 7.9% over 15 years. Over the same time period inflation (as measured by the CPI) was about 2.1%, so dividends increased by about 5.8% per year in real (inflation-adjusted) terms.

 

[Bryan Barnfellow]

My div growth portfolio grows divs by about 6-8% per year on average for last 20 years. Well ahead of inflation. No reinvestment. Current yield about 3.6%

I also manage our own dividend growth portfolio, which produces approximately 40% of our overall income now that we are in retirement. Same growth as you have experienced, again over the last 22 years, with a current yield of about 4%.

Replication of results confirmed.

-BB

 

[Danmar]

I also manage our own dividend growth portfolio, which produces approximately 40% of our overall income now that we are in retirement. Same growth as you have experienced, again over the last 22 years, with a current yield of about 4%.

Replication of results confirmed.

-BB

Excellent. My portfolio are all individual Canadian names. Mostly banks, telcos, and pipes. Total returns over 20 years about 12% CAGR.

 

[Bryan Barnfellow]

Excellent. My portfolio are all individual Canadian names. Mostly banks, telcos, and pipes. Total returns over 20 years about 12% CAGR.

Ours is a concentrated portfolio of 20 US blue chip dividend payers (many in the S&P Dividend Aristocrats list) plus two top REITS and two top Business Development Companies (BDCs). The rest of our income (60%) is in the form of pensions and annuities, along with US and Swiss social security; so, we are able to take a bit more risk in equities.

Cheers and best wishes for a prosperous 2018!

-BB

 

[Danmar]

Ours is a concentrated portfolio of 20 US blue chip dividend payers (many in the S&P Dividend Aristocrats list) plus two top REITS and two top Business Development Companies (BDCs). The rest of our income (60%) is in the form of pensions and annuities, along with US and Swiss social security; so, we are able to take a bit more risk in equities.

Cheers and best wishes for a prosperous 2018!

-BB

Thank you and likewise to you. My divs now represent 40-50% of our spending with the rest company pension. Govt pension not started yet but will not be material. Agree that a good sized pension would allow more risk everything else being the same. My actual portfolio is 100% equity but if I capitalize the pension value I’m at about 65/35 equity to fixed income.

 

[Independent]

At the very broadest theoretical level:

"Inflation" is the increase in consumer prices. That's an expense to us consumers.

But, consumer prices are revenue to consumer products firms. If those firms can make profits go up as fast as revenue, and pay a constant percent of profits as dividends, then dividends can go up with prices.