Inflation is a critical measure that determines whether our income (from employment and investment) allows us to keep up with our cost of living.
Two charts caught our eye recently, each using inflation to put financial security and investment opportunities in a relative context.
First, John Maudlin’s newsletter Outside the Box relays this chart from Greg Weldon (weldononline.com). It presents information from the Bureau of Labor Statistics comparing the Consumer Price Index and U.S. Disposable Income from 1996-2011. The copy is a bit blurry but the lines tell the story. Since 2005, disposable income (black line) has trailed inflation (pink line) and the difference grew significantly in 2011.
This next chart looks at the amount of dollars paid out as dividends by the stocks in the S&P 500 Index of large U.S. companies. The green bars show how the amount of dividend payments has easily surpassed the level of inflation over the past 20 years. The dollar amount of dividends came down during the 2008-09 recession when some companies reduced or eliminated their dividends. Even at the rate much lower than the 2007 peak, dividends offer an alternative that keeps up with the cost of living.
Of course, dividend-paying stocks are not a risk-free asset and the stock prices of the companies paying dividends are more volatile than the bonds of high-quality companies. But for investors who expect to hold the dividend-paying stocks through market ups and downs and use the dividends to supplement their income, the ability to outpace inflation has been consistent.
~ Brooks, Hughes & Jones, Partners in Wealth Management, Tacoma, WA