Dividend Growth Investing: Beating Inflation With Long-Term Investing

Includes: CL, JNJ, KMB, KO, PG, WMT
by: David Crosetti

In a recent article titled "Inflation And The Fallacies of Long-Term Investing," author Daniel Krug makes some very interesting points:

'Invest in stocks for the long term.' Wise advice? Maybe not. This conventional wisdom can easily be proven false. I strongly believe that most investors are ignoring a very important concept that has a dramatic effect on their wealth.

Many investors pay close attention to their rate of return. However, there is a component of investing that many investors fail to fully recognize. This effect is inflation. Inflation is just as important (if not more) when calculating gains or losses of an asset.

In a nutshell, Krug is telling readers that inflation can seriously impact our perception of gains within our portfolios, because the purchasing power of our dollars is being constantly eroded by this inflationary paradigm.

Something To Consider

As a dividend growth investor, my main focus is centered on building an increasing income stream from dividend-paying companies. While I do not discount capital gains, the primary aim of my portfolio is to provide me with an ever-increasing income in retirement. Building a long-term portfolio that accomplishes this goal is achieved through buying certain companies that make up what are commonly referred to as Dividend Champions, Dividend Contenders, and Dividend Challengers.

The common thread among the companies that make up this list is that they have raised dividends on an annual basis, for long periods of time. Those dividend increases, in many cases, have outpaced the rate of inflation. I would surmise that for those of you who missed the inflationary period of the Carter administration, the best way for me to explain inflation in an easy to understand way is this: If you work for a company and every year you get a raise, while the raise puts more money in your pocket, you have to ask yourself, "Is my lifestyle improving or not?"

On the other hand, if you never got a raise, you may find that you're are running out of month before the end of your money. In other words, no raise means less purchasing power since goods and services are costing more and you don't have any "more" to purchase them with.

What You Need To Know

You probably don't need the government to tell you that things are costing more money than they used to. You can see where gasoline prices are going every day. If you are like me and you like to eat red meat, then you know that it's getting to the point where you may need to take out a second mortgage on your house to purchase some rib eye steaks for dinner.

If you are not increasing your income, either at work or in your portfolio, then you are probably having some difficulty in making purchase decisions that may have been routine a year ago. There are many ways that a dividend growth portfolio can help you get a raise every year -- one that is larger than inflation and one that will provide you with a comfortable lifestyle in the future.

Let's look at some of the more popular Dividend Champion stocks and their dividend growth vs. inflation:

It is interesting to note that each of these companies increased their dividends by a rate greater than inflation. These are percentage increases of dollar amounts paid to investors.

As a result, investors who held shares in these companies saw their income stream increase at a faster rate than inflation and their income from dividends increase annually. And, if those dividends were reinvested, then that investor enjoyed the effects of compounding on his investment.

Does this style of investing mean "set it and forget it?" Absolutely not. Any investor needs to exercise management of his/her portfolio and address situations as the arise. Contrary to some opinions of non-dividend growth investors, selling a position in a company sometimes becomes necessary for a dividend growth investor and is done more frequently than you'd think.

Things change. Managing a portfolio is work. You are only as good as the effort that you are willing to put into your work.


While there is no doubt that inflation can reduce the amount of your investment gains and erode your purchasing power over time, dividend growth investing can be a useful tool in combating that loss of purchasing power.

Stated in its most simple terms, dividend growth investing is about finding companies that:

  1. Have a long history of paying dividends to investors
  2. Increase those dividends on an annual basis
  3. Have the earnings power to continue paying those dividends
  4. Are priced at a relative value to intrinsic worth
  5. And holding on to those companies long term

As some of my readers know, Coca Cola (NYSE:KO) and Colgate Palmolive (NYSE:CL) are two companies that I have held for the longest period of time in my portfolio. Kimberly Clark (NYSE:KMB) and Procter and Gamble (NYSE:PG) are two more old stalwarts in the portfolio. Johnson & Johnson (NYSE:JNJ) and Wal-Mart (NYSE:WMT) are the "newbies." My initial purchases of those two only go back 20 years.

Disclosure: I am long KO, CL, KMB, JNJ, PG, WMT.