What Happens To Dividend Growth Investing When Inflation Hits 10%

Includes: GE, IBM, JNJ, KO, MCD, MMM, WBA, WMT
by: Eddie Herring

In a comment to another article recently the question was asked "What happens to dividends and dividend-growth investing if inflation skyrockets to 6-10% or higher?" I thought this was a very good question and this article is intended to elaborate on that thought.

I'm retired and inflation, as it is to most retirees, is an area of concern and importance. And as a dividend-growth investor I want to make sure that the income I receive from my investments stays ahead of inflation. Retirees can have a personal inflation rate that might be more or less than annual inflation rates as published by the government, but in either case the retiree must stay aware of it and manage their income accordingly.

From 1983 to 2013 the inflation rate has averaged 2.89%. Prior to that there was a period of unusually high inflation. With that in mind the time period I decided to use for this review was 1972 through 1984, or beginning 42 years ago and covering the last period of extremely high U.S. inflation rates. By extremely high I mean compared to our normal rates, not extreme such as the billion% rates Zimbabwe experienced in the recent past.

The data that follows comes from multiple sources. The inflation data comes from Tim McMahon's website available at this link and is compiled from the Bureau of Labor Statistics. The S&P500 returns and the raw data (prices and dividends) are from this website which is compiled by Aswath Damodaran from Federal Reserve data. Damodaran is a Professor of Finance at NYU and is considered an expert on equity valuation.

With the exception of Walgreen (WAG) and Johnson & Johnson (NYSE:JNJ), all of the stock price and dividend information I used came from Yahoo Finance and has been adjusted for stock splits. The WAG and JNJ information was taken from their respective websites and also adjusted for stock splits. All of the individual company dividend-growth rates and returns were calculated individually by me from the Yahoo Finance data. Returns have been calculated based on year end closing prices and include the dividends.

The High Inflation Years

1982 was the last year that the inflation rate exceeded 6%. But that was actually the ending of a period of high inflation. In 1972 the inflation rate was 3.27% and then rose to 6.16% in 1973, almost doubling. It then jumped to 11% in 1974, a 78.6% increase. In October 1973 the Yom Kippur war occurred and the Organization of Petroleum Exporting Countries, or OPEC, decided to restrict the flow of oil to countries that supported Israel in that war. Consequently the price of oil and fuels jumped, affecting transportation costs and causing severe inflation across the board in both the US and Europe, and setting off a global recession.

Between the end of 1973 and year end of 1974 the Dow Jones Industrial Average declined 27.5% and the S&P500 declined 29.7%. Over the 10-year period of 1973 to 1982 inflation averaged 8.8% and we encountered the "malaise" years of the Carter administration along with record interest rates. But what would have happened to an investor during that time period, and more specifically to a dividend-growth investor?

As can be seen from the above chart of the S&P500 the market gave a negative return during both 1973 and 1974, and while inflation rose significantly during this time period, the market's decline should not be attributed solely to inflation. A long-term investor from 1972 that was willing to ride out the declines would have seen their returns improve in the following years.

But of more significance to the dividend-growth investor is the dividend-growth rates during this time. As can be seen the dividend-growth rate for the S&P rose in each and every year, averaging 7.34% over the entire time frame of 1972-1984. While this doesn't mean that each of the dividend payers out of the 500 companies making up the index raised their dividends, it does indicate an overall increase in the total. The downside for the dividend-growth investor is that the inflation rate during this period averaged 7.57%.

Individual Dividend Growth Company Results

Many dividend-growth investors, me included, prefer to select individual companies in which to invest rather than selecting an index fund. So let's look at what would be considered more typical dividend-growth companies to see what happened to them. The following charts will primarily cover the time period of 1973 to 1984.

Johnson & Johnson

Over this period JNJ averaged a dividend-growth rate of 19.07% and an average total return of 6.23%. More significant is that only once out of the 12-year period did JNJ's DGR fail to exceed the rate of inflation. Its average increase was 2.65 times the inflation rate.

The Coca-Cola Company

The Coca-Cola Company (NYSE:KO) for many has been considered one of the more reliable dividend-paying companies, having raised their dividends for 51 years. As can be seen below KO's stock price got hammered in 1974 yet it still had a dividend-growth rate increase of 15.57%. And the stock price also bounced back the following year. It also averaged a dividend-growth rate of 10.72% and a total return average of 19.58%, exceeding the S&P500 by 9%. Its average yield over this time period was 10.80%. By today's standards that seems unusually high but that high inflation period was followed by the euphoria of the 90s and by 1999 KO's dividend yield had declined to 1.55%. But in 1980, 1981, and 1984 KO's DGR declined to less than that of the inflation rate.

The 3M Company

The 3M Company (NYSE:MMM) is a conglomerate that, while not necessarily one of the more popular dividend-growth companies because of its typically lower yield, has been increasing its annual dividend for 56 years. Over this time period MMM averaged a yield of 10.5% and a DGR of 11.26% while averaging a total return of 16.70% each year.

The Walgreen Company

In 1973 if someone said "I need to go to the drugstore and get some medicine" they were quite likely to have gone to a Walgreen since they had over 600 stores and were filling around 25 million prescriptions annually. Historically WAG has not been a high yielder and it was no different during this time period. Their average yield was 4.91%, and the DGR averaged 7.90%, barely exceeding the average rate of inflation, but the total return averaged 39.96%. In 1983 WAG paid a special dividend as indicated by the * in the chart above and I have removed that special dividend in order to maintain continuity in the calculations. But in reality the special dividend more than offset any the inflation rates, raising the DGR in 1983 to over 6,100%.


One of my all time favorite quotes came from Thomas Watson Sr., the first Chairman and CEO of IBM (NYSE:IBM), who said, "I'm no genius. I'm smart in spots, and I stay around those spots." IBM has not always been the top technology company but they found their spot and have performed well in that spot. From 1973 to 1984 they averaged a dividend yield of 8.48%, a dividend-growth rate of 12.15%, 4.58% better than the inflation rate for that period, along with averaging a 20.34% annual return for that period.

General Electric Company

While today General Electric (NYSE:GE) isn't known as a dividend-growth company because of cutting their dividend, many long term investors still hold it in their portfolio. GE performed well during this high inflation period, with a dividend yield of 11.91%, a dividend-growth rate of 9.53%, and a total return that averaged 24.83% per year.


Wal-Mart (NYSE:WMT) has typically been a low-yield stock and this was certainly true in the high inflation period discussed here. WMT began paying a dividend in March 1974 ($0.05 per share) and yielded only 1.02% on average for that time frame. However, their dividend-growth rate was an excellent 49.89% average and they had a total return that averaged 52.53% annually during this time period.


McDonald's (NYSE:MCD) has become a perennial dividend-growth favorite. But in 1973 it wasn't even paying a dividend. I include it here because it started paying in 1976 after two years of very large inflation. In 1977 it raised its dividend almost 132%, even though the total return the prior year was down 7%. For the remainder of that time period it averaged a yield of only 1.73% but grew its dividend at a rate of almost 46% per year. For the entire 12-year period it averaged a total return of 11.60%.

Using Available Data

This is obviously not an extensive study. Many (if not most) internet data sources limit their data for stock prices and dividends to 20 years. Consequently this made the data more difficult to obtain and required quite a bit of manual searching. You may have noticed there were no BDCs, MLPs, or REITs, on the above list. I checked every company in these categories that were on the CCC list against the Yahoo Finance site and was unable to find stock price and dividend histories that were sufficiently long to determine how they deal with high inflation periods. Even The Realty Income Company (NYSE:O), which has been paying dividends for 44 years, only became a publicly-owned company in 1994 and their website only lists dividends back to 1995.

Companies such as Mergent (or MergentOnline) or S&P Capital IQ's Compustat provide databases that include data that go beyond the standard 20-year time frame but one must have a subscription for access. If a reader is interested in further researching this some of the larger libraries may have this database, or university libraries.

One can quickly ascertain that there are at least 51 companies that were paying dividends during this time period that continued to raise them since that is the number of dividend champions on David Fish's CCC list with a track record of 41 years or more. And if we use 1980 when inflation hit 13.58% that becomes 75 companies that continued to raise dividends during this period.


I've written before that one of the prime factors in setting up and managing my portfolio is the stability of the income. A retiree that suffers a dividend cut must replace that dividend or live with less income. Accordingly it behooves the retiree, as well as other DG investors, to remain cognizant of how the companies in their portfolio have previously reacted to high inflation rates. Think of it like this, if inflation goes up 6% and your DGR only goes up 4%, you just took a pay cut of 2%.

Obviously I want my income to stay ahead of inflation. My rule of thumb is that I want my DGR to be twice the rate of inflation. Since 1914 on average the annual inflation rate has been around 3.3% so I look for a dividend-growth rate of a minimum of 6.5%. Every one of the companies shown above exceeded that growth rate on average during the period of high inflation.

No one knows the future and no one in their right mind would want record inflation. High inflation makes life difficult for those with finite incomes, and especially senior citizens on social security or those with fixed incomes such as annuities. Of course inflation alone is not the only driver that can move the market during inflationary times and the astute investor will keep an eye on the business performance of the companies in their portfolio.

What can we ascertain from the records of these companies? While this may be too small a sample size to arrive at a high probability conclusion, the company records I manually reviewed lead me to believe that the dividend-growth investor has no reason to doubt their methodology when inflation raises its ugly head. One can expect volatility to increase and returns to be impacted. But the long-term dividend-growth investor focused on income and business fundamentals should not be panicking over short-term price movements. The recipe remains the same, which is to look for and invest in quality companies that continue to raise their dividends annually and don't be chased out of an investment because of price volatility. I believe that's a recipe not only for survival but also for success.

Disclosure: I am long JNJ, KO, MCD, O, WAG, WMT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: I am not a professional investment advisor, just an individual handling his own account with his own money. You should do your own due diligence before investing your own funds.