Beat Inflation With Rising Dividends

The generally accepted recommendation for retirees is to reduce risk and buy fixed income investments such as bonds.  A common suggestion is to have the percentage of fixed income assets equal to your age.  What is often overlooked is the risk of inflation eroding purchasing power.

One way to beat inflation is to focus on companies that continuously raise their dividends, such as the “Dividend Aristocrats.”  This gives you a stream of income that rises as fast as the cost of living.

Related: 6 reasons to invest in dividend growth stocks

The Consumer Price Index rose 2.7%.

In the last few months, several companies have announced dividend increases.  Here are a few:

  • TD Bank increased their dividend by 5.6%.
  • Royal Bank had a 6% increase.
  • TransCanada Corp increased by 5%.
  • Rogers Communications increased by a whopping 11%

Bonds vs Dividends

Let’s take the example of Barney and Dorothy.  Close to retirement, Barney is advised to switch his equity mutual funds into “safe” 10-year Government of Canada Bonds earning a yield of approximately 2.3%.

Barney has $100,000 in bonds at a coupon rate of 3%.  He will receive a semi-annual payment of $1,500.  After 5 years he’ll still receive the same payment amount, eroding his purchasing power and perhaps forcing him to dip into his capital thereby taking the risk of outliving his money.

Related: The Risk of Inflation

Dorothy, on the other hand, has gradually over the years been purchasing good quality, dividend-paying stocks.  The year she retires her dividend yield is approximately 3%.  However, after 5 years, her dividends have increased each year so her income stream easily keeps up with inflation.

Dividend growth stocks

I like to stick with companies that regularly increase their dividends.  Retirees who do likewise will generate an income stream that rises each year.

These stocks have raised their dividends for at least five years in a row:

Company Current dividend 5 years ago
CNR 1.50 / share 0.65 / share
Canadian Utilities 1.77 / share 1.20 / share
Enbridge 1.13 / share 0.58 / share
Fortis 1.20 / share 0.67 / share
Telus 2.44 / share 1.20 / share

Final Thoughts

The TSX composite index dividend yield is higher than many bond yields which makes them a better deal, especially after the favourable tax treatment of dividends.  Dividends tend to grow over time, whereas most bond payments do not.

Don’t make the mistake of buying stocks that have the highest dividend yields.  Some companies keep their dividends high (or even continue to raise them) even when earnings are declining.  An ideal dividend payout ratio, depending on the industry, is 30-60% of earnings.

Related: Criteria for selecting a dividend growth stock

If you want to try investing in REITs, be aware that the dividend includes some return of capital.  Make sure you do proper due diligence.

You should hold high-quality companies in the more stable financial, utilities and consumer sectors.  But for a diversified portfolio you should also include stocks in the resource and manufacturing sectors.

My two main goals for my retirement investments are:

  1. To earn income to maintain my lifestyle, and
  2. To safeguard my capital.

Steadily rising, dependable dividends attract income-seeking investors.  As the dividends rise, these investors will also bid up the price of these shares.

18 Responses to Beat Inflation With Rising Dividends

  1. Great post! I’ve been thinking about this strategy myself but keep keep telling me I should buy a home first or invest in mutual funds. (I’m in my thirties, but retirement is a priority before home ownership. If I can’t do both, I can’t afford to buy).

    When is the best time to start buying dividend paying stocks? Is this a strategy mainly for older adults, or is it a good idea for younger workers to tap too?

    • @Beth: I started investing by buying mutual funds. It’s a good way to start off using smaller regular purchases. Once I reached $25000 I opened a RRSP account with TD Waterhouse (that was the minimum for waiving the $100 annual fee). I was in my mid 30’s.

      I got hooked on the regular dividends. I have not contributed to my RRSP for at least the last 5 years but I stay busy reinvesting the dividends and my account is growing well.

      One alternative is to start a DRIP. You can buy as little as one share to start and the dividends are reinvested for you. If you buy through a brokerage however you will have to pay for each new purchase.

    • You should start when you are 10 years old :) It’s a growth strategy that you can do and benefit from for years. Imagine what dividends you would earn after 30 years of growth.

      I started a few years back with dividend stocks but I have gotten my kids started already.

      Hope I answered your question. To that end, it’s money you don’t really want to touch for a very long time.

  2. I recently started up a small account with Sharebuilder that I’m using to purchase Dividend Aristocrat stocks. The plan is to let it grow with monthly contributions and reinvested dividends. Eventually I’ll stop reinvesting them and use them as a supplemental source of income.

  3. Thank you for this post! I’m 32 and my husband and I have already been saving and investing toward our retirement but I am scared to death that it won’t be enough or that we will run out of money. We currently have stocks in some financial institutions but I am having him look at this to see if we should make some changes.

    • @Kasi: Financial institutions are usually good investments. I have had TD Bank stock for over 25 years. It’s a good idea to have some diversification. For example, telecoms and utilities are doing well right now and pay good dividends.

      As I said above, I like the idea of earning income from my investments. Then I don’t have to worry so much about running out of money.

  4. Rogers Communications is one of my favorite dividend stocks. I like the Dividend Aristocrats but a majority of them have very small yields. As you mentioned, many utility stocks have strong yields and steady dividend growth. Dividend growth is the key and there are a lot of great companies out there that haven’t quite reached the 25 year status like the Aristocrats.

    • @Zach: Thanks for your comments. You are right that there are a lot of good dividend paying companies. A few have increased their dividends twice (or even three times) in one year and then miss the next year, so they don’t make the Aristocrat list. It’s a mistake to solely rely on a predetermined list without doing further research.

  5. This why I have started transferring money from my savings to dividend-paying companies. Sure I can keep the money earning .5% interest, or I can invest in certain relatively stable or growing companies that pay dividends while taking on some risk. I’ll take the risk, because .5% isn’t even matching inflation. I’m just keeping some money in savings for emergencies.

  6. Dividends during retirement have received a lot of criticism due to the principal being able to decline. But as a wealth income generation tool and hedge against inflation, I like the idea of holding them in my portfolio. I am slowly building my Aristocrats right now and hope to use them during early retirement.

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