Monday, January 17, 2022

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How to Keep Pace With Red-Hot Inflation

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Marc Lichtenfeld

Up until last year, it had been a long time since anyone had to worry about keeping up with inflation.

The recent 7% reading of the consumer price index is the highest inflation reading since 1982. Prior to last year, other than a short blip in 2011, inflation had been mostly nonexistent for more than a decade, spending most of the time below 2%.

U.S. Consumer Price Index
 

That changed suddenly as the world started reopening. As fast as an uncoiling spring, people began opening their wallets to resume living the lives they'd been denied for a year.

Inflation is on everyone's mind today, and that 7% figure doesn't begin to tell the story. Prices are higher in nearly all walks of life - and in some, they're up considerably. Have you ordered from a restaurant lately, considered buying a car or booked a hotel room?

Wall Street experts and economists are all talking about inflation today, yet almost no one was when I warned readers of my Oxford Income Letter last year that "inflation will be here sooner than most expect" and when we started positioning our portfolios accordingly.

Fed Chair Jerome Powell has only recently come to share my concern, as he had previously vowed to keep interest rates near zero. That would've been great news if you were looking for a mortgage. Terrible news if you were hoping your investments would keep up with inflation.

Treasurys - a staple for conservative investors - pay nothing. The 10-year Treasury yields just more than 1.7%.

But even more aggressive bonds aren't keeping up with inflation.

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The average high-yield (junk) bond yields less than 4% today, down from nearly 6% two years ago (before the pandemic).

So where can an investor obtain a relatively safe yield that will keep up with inflation?

In 2012, I wrote the first edition of my book Get Rich with Dividends to answer that question - and the following year, I launched The Oxford Income Letter (we just celebrated our 100th issue in 2021).

The strategy behind both is my 10-11-12 System, which is focused on dividend growth for the exact situation we find ourselves in today. It shows investors how to earn 11% yields within 10 years or 12% average annual returns in 10 years with dividends reinvested.

We want our recommendations to not only keep up with inflation but also increase our buying power.

If, in 2013, you'd bought one of my first recommendations - Texas Instruments (Nasdaq: TXN) - and were still holding today, aside from seeing your stock go up by nearly seven times, your yield would be 13.5%, almost double the current rate of inflation.

Or consider Enbridge (NYSE: ENB). I recommended it less than three years ago, and investors are now enjoying a 7.4% yield on their original purchase price.

If you're relying on your investments for income, that income needs to be able to grow. There aren't many safe investments that will do that.

And while all stocks carry risk, dividend growers outperform over the long term and have never had a down 10-year period as measured by the S&P 500 Dividend Aristocrats Index.

By investing in stocks that raise their dividends every year, you're boosting your buying power.

Whether inflation drops back down to 2% or goes up higher from here, if your dividends are growing by 8%, 10% or more, you won't have to worry about rising prices because your dividends should have you covered.

As inflation continues to rise (as I expect), dividend growth stocks will help you beat it.

Good investing,

Marc

P.S. If you haven't yet, check out my free Inflation Emergency Broadcast where I sit down with Larry Kudlow, former director of the National Economic Council of the United States, to discuss the worsening inflationary crisis.

In it, I explain the smart way to keep up with inflation by using quality dividend payers to produce a never-ending income stream.

Click here to see for yourself.

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