How My Portfolio Could Beat Inflation This Year | Smart Change: Personal Finance

(Chuck Saletta)

Back in late 2012, I launched the Inflation-Protected Income Growth Portfolio. It was a real-money investment account dedicated to seeking out investments with the potential to increase their dividends over time to help fight inflation.

Due to low readership, the article series around that portfolio ended a few years later. Since it was my real money invested in that account, however, I kept it invested with the same principles that launched the series in the first place. And even in today’s uncertain economy and market, it looks like the portfolio may very well deliver as designed.

Image source: Getty Images.

A decent strategy with income growth potential

From the portfolio’s launch in December 2012 through June 30, 2022, its value increased from $30,000 to $101,738.14, more than tripling in just under a decade. While respectable, its 239% total return over that time largely matched the 221% total return of the SPDR S&P 500 Index ETFan S&P 500-index-tracking exchange-traded fund, with dividends reinvested.

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More importantly, though, the portfolio has largely delivered against its key income growth design criteria. Indeed, there’s a very real chance that the dividend-like income it throws off in 2022 could be higher enough above the dividend-like income it generated in 2021 to outpace inflation. That holds true even with an 8.6% inflation rate running roughshod over consumers’ everyday purchasing power.

In 2021, that account generated $2,679.81 in dividend-like income. As of June 30, 2022, it has generated $1,454.38 so far this year. Assuming the back half ends up exactly like the first half, the projected $2,908.76 in dividend-like income for 2022 would be just over 8.5% higher than what it received in 2021. quite Beating inflation, it does just assume that the second half of the year will be just like the first half. Instead, there’s good reason to believe that it could be stronger.

The three keys to the portfolio’s success

The three key divers of optimism come from a combination of dividend growth, opportunistic reinvestment, and prudent portfolio pruning.

From a dividend growth perspective, several of the portfolio picks actually increased their dividends in between March and June 2022. Elevator and escalator manufacturer Otis Worldwide led the charge with a whopping 20.8% increase, though railroad giant Union Pacific and its 10% increase didn’t hurt, either. As a result, even if their dividends hold steady for the rest of the year, that increase translates to more dividend income in July through December than January through June.

And who says the other companies in the portfolio have to keep their dividend payments static? Cereal giant General Mills announced a 6% increase in its dividend starting this July, and credit card specialist Synchrony Financial will raise its dividend by 5% for the second half of this year, as well.

The portfolio was designed around companies with a history of increasing their dividends, so it should be no surprise that several of them have been able to keep the trend going. Still, the great thing about having investments that generate cash dividends is that they give you cash to invest, without having to sell your existing holdings or make an additional deposit into your account.

It’s an opportunistic reinvestment of that generated cash that me to pick up shares of enabled industrial conglomerate 3M in February of this year, after it increased its dividend for the 64th consecutive year. While my purchase missed the company’s first-quarter dividend, that does mean that the account will very likely receive more dividends from 3M in the second half of 2022 than it did in the first half.

And finally, there’s portfolio pruning. Although the account is based on companies with a history of paying and increasing their dividends, it’s important to remember that dividends are never guaranteed payments. The account held shares in two companies — entertainment titan Walt Disney and generic pharmaceuticals manufacturer Teva Pharmaceutical Industries — that eliminated their dividends.

Both of them have seen their businesses recover well enough that if they wanted to resume paying their dividends, they could have. Disney, in particular, has made it clear that it would rather reinvest than directly reward its shareholders with cash. Those companies are of course free to operate as they see fit, but their dividend eliminates and failure to restore those payments make them incompatible with an income-growth oriented portfolio.

As a result, I sold both of those companies and used the proceeds (plus some additional cash that had accumulated from other dividend payments) to buy shares of auto parts retailer Genuine Parts. I received my first dividend payment from that purchase on July 1, guaranteeing that the account will receive more dividends from that company in the second half of 2022 than it did in the first half.

It all adds up to the potential of inflation-beating income growth

Add a strong front-half dividend performance to the already announced dividend actions from several companies held by this portfolio, and there’s a very good chance its income growth will beat inflation. At a time when inflation is at the fastest pace it has been in over 40 years and the stock market is down over 20%, it’s good to know that there is something with the potential to continue to keep pace.

Dividends are never guaranteed payments, but with the combination of some dividend growth, opportunistic reinvestment, and prudent portfolio pruning, they can still provide benefits even today. With the market down as far as it has been recently, now might even be a great time to start seeking out bargain prices on dividend-paying companies to give yourself a chance to keep pace as well.

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Synchrony Financial is an advertising partner of The Ascent, a Motley Fool company. Chuck Saletta has positions in 3M, General Mills, Genuine Parts Company, Otis Worldwide Corporation, Synchrony Financial, and Union Pacific. The Motley Fool has positions in and recommends Walt Disney. The Motley Fool recommends 3M and Union Pacific and recommends the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool has a disclosure policy.


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