Has Dividend Growth Kept Up With Inflation?

by: David Van Knapp

About a year ago, I published an article about dividends keeping up with inflation. At the time, I only had data going back to 1988 (22 years). Now I have found a better source, with S&P 500 dividend increases going back to 1960 (51 years).

The S&P 500 is not a good proxy for a well-selected portfolio of dividend growth stocks. But it can be used to illustrate broad trends, and I think that it is instructive with respect to the question of whether dividend growth has tended to keep up with inflation.

In the earlier article, I concluded that "…a portfolio of well-selected dividend-growth stocks will outperform the S&P 500 in [income] metrics that are important to retirees: yield, annual growth, and dollars received." The new data set supports the same conclusion, although there are clearly some years when inflation has outpaced dividend growth in the S&P 500.

It is important to note that when asking whether dividends "keep up with" inflation, the proper numbers for comparison are the inflation rate and the dividend growth rate (not the dividend yield). That way, you are comparing a growth rate to another growth rate. Whether the amount you start out with (your initial dividend stream of income) is sufficient for your needs is a different question entirely. Here, we are concerned with its growth rate, not its size.

Here are the numbers going back to 1960. The dividend growth rate is the annual growth rate in dividends for the S&P 500. The inflation rate is CPI-U, the inflation rate calculated by the Bureau of Labor Statistics for all urban consumers. Each data set has its own idiosyncracies, but to try to answer the question in a general sense, one needs to use standardized data.

Year

Dividend Yield

Dividend Increase

Inflation Rate

Dividend Increase > Inflation?

1960

3.41%

1961

2.85%

3.0%

1.1%

Y

1962

3.40%

5.4%

1.2%

Y

1963

3.13%

9.3%

1.2%

Y

1964

3.05%

9.8%

1.3%

Y

1965

3.06%

9.7%

1.6%

Y

1966

3.59%

1.8%

3.0%

N

1967

3.09%

3.5%

2.8%

Y

1968

2.93%

2.0%

4.3%

N

1969

3.52%

6.6%

5.5%

Y

1960's: $100 becomes

163.74

124.16

7/9

1970

3.46%

-1.5%

5.8%

N

1971

3.10%

-1.0%

4.3%

N

1972

2.70%

0.9%

3.3%

N

1973

3.70%

13%

6.2%

Y

1974

5.43%

3.0%

11%

N

1975

4.14%

0.3%

9.2%

N

1976

3.93%

13%

5.6%

Y

1977

5.11%

15%

6.5%

Y

1978

5.39%

6.6%

7.6%

N

1979

5.53%

15%

11%

Y

1970's: $100 becomes

161.93

197.10

4/10

20-year cumulative

299.62

244.72

11/19

1980

4.74%

7.8%

14%

N

1981

5.57%

6.0%

10%

N

1982

4.93%

1.5%

6.2%

N

1983

4.32%

2.7%

3.2%

N

1984

4.68%

10%

4.3%

Y

1985

3.88%

4.7%

3.6%

Y

1986

3.38%

-0.0%

1.9%

N

1987

3.71%

12%

3.7%

Y

1988

3.68%

11%

4.1%

Y

1989

3.32%

15%

4.8%

Y

1980's: $100 becomes

196.12

171.20

5/10

30-year cumulative

587.64

418.97

16/29

1990

3.74%

5.3%

5.4%

N

1991

3.11%

5.0%

4.3%

Y

1992

2.90%

-2.5%

3.0%

N

1993

2.72%

0.0%

3.0%

N

1994

2.91%

5.3%

2.6%

Y

1995

2.30%

6.1%

2.8%

Y

1996

2.01%

5.1%

2.9%

Y

1997

1.60%

4.2%

2.3%

Y

1998

1.32%

4.4%

1.6%

Y

1999

1.14%

3.1%

2.2%

Y

1990's: $100 becomes

141.97

134.45

7/10

40-year cumulative

834.27

563.32

23/39

2000

1.23%

-2.6%

3.4%

N

2001

1.37%

-3.3%

2.8%

N

2002

1.83%

2.2%

1.6%

Y

2003

1.61%

11%

2.3%

Y

2004

1.60%

8.6%

2.7%

Y

2005

1.79%

15%

3.4%

Y

2006

1.77%

12%

3.2%

Y

2007

1.89%

11%

2.9%

Y

2008

3.11%

1.2%

3.9%

N

2009

2.00%

-20%

-0.3%

N

2000's: $100 becomes

134.31

129.06

6/10

50-year cumulative

1120.48

727.00

29/49

2010

1.84%

3.6%

1.6%

Y

2011

2.07%

13%

3.2%

Y

51-year average

5.4%

4.1%

51-year cumulative

1334.51

762.27

31/51

Click to enlarge

Sources: S&P 500 dividend yield and dividend increases are from NYU's Stern School of Business. Here is a direct link to the page containing the table from which this information was drawn. Inflation rate from Inflation Data, direct link. The "$100 Becomes," "Dividend Increase > Inflation?," averages and cumulative figures are as computed by the author.

Observations

  1. Over the 51 years covered, dividend growth exceeded inflation in 31 years (61% of the years).
  2. Over the 51 years, a $100 initial dividend stream would have compounded to $1334.51 per year. A $100 expense budget would have compounded to $762.27.
  3. Dividend growth was negative in 7 of the 51 years. Inflation was negative in only 1 year.
  4. The average yearly dividend growth was 5.4%. Average annual inflation was 4.1%
  5. The span in dividend growth ranged from -20% (in 2009) to +15% (1979 and 1989). The span in annual inflation was from -0.3% (2009) to + 14% (1980).

Discussion

There is no question that over very long time frames, dividend growth has handily exceeded inflation. Year-by-year, dividend growth was higher than inflation in 31 of 51 years. The average yearly rate of dividend growth (5.4%) exceeded the average annual inflation rate (4.1%) by 32%. Compounded over 51 years, dividend increases grew an initial amount by a total of 75% more than inflation. In other words, the dividend stream grew to more than 13 times its original size compared to almost 8 times the original amount for expenses.

Over some shorter time frames, inflation outpaced dividend growth. In 1980-1983, inflation exceeded dividend growth for 4 straight years, and in 1970-1975, inflation exceeded dividend growth in 5 of 6 years. In the decade of the 1970s, inflation exceeded dividend growth cumulatively for the whole decade. In all other decades, dividend growth exceeded inflation cumulatively in each decade.

My takeaway from this data is that one cannot expect a growing dividend stream to exceed inflation in every year, but that over long times, dividend growth will handily exceed inflation. Again, using the S&P 500's record of dividend growth is not a good proxy for a focused dividend growth portfolio, where presumably the performance would be better than for the index. Most dividend growth investors, for example, experienced portfolio-wide dividend growth in 2009 rather than the -20% drop shown in these statistics. To me, that underscores the needs both to select your dividend stocks carefully in the first place, and then to monitor your dividend growth portfolio and prune it (usually) of stocks that cut their dividend or that appear to have dividends in serious danger of being cut.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.