One shouldn't discount the dividend income from common stocks in today's low interest rate environment. Quality dividend paying stocks that are bought with a long-term orientation are very likely to be less risky than cash today. And while the Federal Reserve has indicated that it continues to promote low interest rates, companies continue to pay and increase their dividends.
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A Quick Take on Inflation
To say that cash is a risk-less asset is almost as fallacious as saying that stocks are a riskless asset. Inflation, or the gradual erosion in the purchasing power of money, is a very serious risk that should be taken into account when considering cash. Indeed, there are times when the economic risks of not having cash outweigh any inflationary risk such as the 2008 financial crisis. But the idea of having cash as the only egg in your basket can also be quite risky. Never neglect inflation.
Oil is a natural resource whose global demand will only increase over time. In the short run, volatile oil prices will affect the profits of oil companies but it probably won't affect the nearly 5% dividend yield paid by BP (NYSE:BP). The company generates enough cash flow to take care of its legal liabilities while still retaining the dividend. When those liabilities are settled, the share price will likely head higher.
SEE: Why Dividends Matter
Dividends are often a good sign that a business is operating soundly enough to return cash to shareholders. Consumer products company Energizer Holdings (NYSE:ENR) is doing just that by announcing its first ever 40 cents quarterly dividend to shareholders. Shareholders can now expect roughly a 2% yield from Energizer. And as is often the case, Energizer also announced a share repurchase which should continue to enrich shareholders. Another consumer giant PepsiCo (NYSE:PEP) just upped its dividend for the 40th consecutive year. The dividend increase takes PepsiCo's yield to around 3.1%, a step up rival Coca-Cola's (NYSE:KO) 2.6% yield. Longtime PepsiCo holders are not surprised: Pepsi has paid dividends without interruption since 1952.
The Bottom Line
Increasing dividends not only give investors more income but more importantly they shield investors from the perilous effects of inflation. Increasing dividends usually go hand in hand with increasing earnings at a company, which over time creates a higher stock price. It's a win-win from an investment and inflationary standpoint.
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At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.