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.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Economic Reality
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.)

A Solution
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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Bonds & Fixed Income

    The Top 5 High Yield Bond Funds for 2016

    Learn about mutual funds and ETFs that invest in high-yield bonds. Read about the risks and rewards associated with investing in high-yield bonds.
  2. Chart Advisor

    Rare Earth Metals Continue To Struggle

    Rare earth metals are used in many of today's products and many investors are wondering if consumer demand is enough to offset the global economic slowdown. We'll take a look at how they are ...
  3. Mutual Funds & ETFs

    3 ETFs to Consider Before an Interest Rate Hike

    Learn about potential impacts of the Federal Reserve boosting interest rates and three ETFs that can help you capitalize on the perceived December increase.
  4. Mutual Funds & ETFs

    A Complete Guide to Tax Loss Harvesting With ETFs

    Using exchange-traded funds (ETFs) to harvest tax losses can be a smart way to maximize your portfolio's tax efficiency.
  5. Mutual Funds & ETFs

    Why ETFs Are a Smart Investment Choice for Millennials

    Exchange-traded funds offer an investment alternative to cost-conscious millennials who want to diversify their portfolios with less risk.
  6. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  7. Mutual Funds & ETFs

    Should Investors Take a BITE Out of This New ETF?

    ETF BITE offers a full menu of restaurants. Is now the right time to invest?
  8. Financial Advisors

    5 Things All Financial Advisors Should Know About ETFs

    Discover five things all financial advisors should know about ETFs, including when ETFs may be a better choice for your clients than mutual funds.
  9. Stock Analysis

    The Top 5 ETFs to Track the Nasdaq in 2016

    Check out five ETFs tracking the NASDAQ that investors should consider heading into 2016, including the famous PowerShares QQQ Trust.
  10. Investing

    Time to Bring Active Back into a Portfolio?

    While stocks have rallied since the economic recovery in 2009, many active portfolio managers have struggled to deliver investor returns in excess.
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>

You May Also Like

Trading Center