A dividend is only as valuable as it is reliable. A 5% yield is no good if it goes away after a year. More so, a dividend that turns out to be temporary is usually bad news for the share price of the underlying company. On the other hand, a consistent dividend can create tremendous value over time. Even better are those dividends that are both consistent and growing.
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Regardless of what the headline numbers say, the economic reality is that future inflation is about as certain as death and taxes. While the Federal Reserve continues to keep rates low to help spur economic growth and inflation, U.S. consumers know better. A gallon of gas costs a lot more than it did five years ago. The weekly trip to the grocery store is more expensive than it used to be, as is the monthly electric and cable bills. Investing in sound dividend paying stocks that are likely to boost dividend payments is a great way to combat the forces of inflation. Money sitting in a bank account over the past few years earning less than 1% may seem risk free but it really isn't when you consider the inflationary effects on every day goods and services. If your annual income, whether thru a salary increase or interest or dividend payments, is not going up, then inflation is decreasing the value of your capital. (For related reading, see The Power Of Dividend Growth.)
With respect to an investment portfolio, inflation has not been an issue to shareholders of McDonald's (NYSE:MCD) and Coca-Cola (NYSE:KO). McDonald's currently yields 2.9% and has maintained a similar yield on its stock price for many years. Thanks to a steadily increasing share price, McDonald's has been boosting that dividend payout every year going back to 1996. Back then, the dividend was 15 cents a share; today you get $2.80 in dividends per share. The same goes for Coke, which also yields nearly 3%. As the company increases its profits, it does the same with its dividend, giving shareholders a growing income stream each year.
These quality yields come from high quality companies. Years from now, people will still want Coke and Big Macs. They will also want deli meat, cookies, and other food products made by Kraft (NYSE:KFT), which yields 3% and is a safe long-term investment. Investors wanting more diversity could find it via the Vanguard High Dividend Yield ETF (NYSE:VYM) which yields 2.8% and includes names like Coke, along with other quality dividend payers like Exxon Mobil (NYSE:XOM) and Johnson and Johnson (NYSE:JNJ).
The Bottom Line
The value that these companies have created over the years is in large part due to the dividends they pay out to investors. Severals years from the story will likely be the same and many investors will be better off even amidst inflationary forces.
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