How to invest in a period of rising inflation – opinion

“It’s a way to take wealth away from people without having to openly raise taxes. Inflation is the most universal tax of all. “- Thomas Sowell

For the first time in many years, inflation has reared its ugly head. This time it seems to be a global problem. Partly caused by coronavirus lockdowns and bad government policy, we’ve started to see a real shortage of goods for the first time in decades, and the shortage means people will pay more to get their hands on the product, leading to higher prices and inflation.
Israel is no different, as the prices of gas and construction materials are the main examples of local inflation. Then, of course, there is the price of the food. Go to your local supermarket and you will notice that your bill is higher than it was six months ago. I’m not even talking about this week’s Channel 12 “research” on Shufersal’s different online shopping options, which offered shoppers cheaper prices on certain products through certain websites. The investigative journalist in a moment of complacency literally simply tweeted as I write this column that “Due to the investigation into Tochnit Chisachon [Saving Plan]: Shufersal will stop their Mehadrin site on November 15. “Congratulations! Everyone will pay more now. This would be a new category of inflation – let’s call it ‘stupid reporting’ inflation.

Rising inflation has left many speculating, not if interest rates will start to rise, but when. The question is not just when will they start to rise, but how investors should position their portfolios for the long-awaited new reality.

Conventional wisdom says that as interest rates rise, investments that pay interest or dividends will decrease. Why? Let’s use an example that is purely hypothetical. Let’s say you own a JP Morgan bond that yields 1.5% per year. If the rates are at zero, 1.5% is a good deal and there is demand for that bond. If rates go up and I can get 2% of a government insured deposit, why would I bother with the JP Morgan bonus? What happens then is that the price of the bond falls due to lack of demand.

Illustrative photo of Israeli money (credit: MARC ISRAEL SELLEM)

Based on that basic principle, it would be logical to think that dividend-paying stocks would suffer the same fate. After all, if you get a 2.75% dividend on Intel shares, that’s great compared to a zero interest rate on a deposit.

But if rates go up, that 2.75% is much less intriguing and the stock price could go down.

Interestingly, the theory on dividend stocks is not entirely clear. In fact, if you take a look at some historical figures, you’ll see that high-yield dividend-paying stocks may be the way to go.

According to research by Global X, since 1960 there have been 10 cycles of significant increases in interest rates. In three of those cycles, dividend stocks underperformed the overall market. In seven of the periods there was a significant over-performance of these stocks.

For me, those numbers are not very convincing. In general, I would not advise clients based on that type of data because it does not overwhelmingly point to potential success. But if you dig a little deeper into the data, an interesting trend stands out.

According to Global X, “All three cases of underperformance occurred in periods with interest rates rising faster.” This means that in the three periods in which dividend stocks underperformed the market, the US Federal Reserve raised interest rates aggressively in a short period of time. In the seven cycles in which high-yield dividend stocks performed best, the Fed raised rates over an extended period in a much less aggressive manner.

I think now many experts would say that there will not be many rate hikes and that they will last. I’m not sure this expert agrees, but that’s for another column. If that’s true and we learn from history, high-yielding dividend stocks may be the way to invest.

Generally speaking, dividend investing strategies are quite popular and have been profitable in the past. Strong companies with a long history of paying dividends (like Johnson & Johnson) tend to be companies that perform well, generate profits and substantial cash flow, and are returning that money to shareholders.

It is a very good sign if a company is distributing dividends to shareholders and still has enough cash left to expand and grow its business.

There is certainly value in investing in dividend-paying stocks if done in a context that helps you achieve your goals. It can also be the prudent way to invest when interest rates finally go up. Review your portfolio and see if there may be room to incorporate high-yielding dividend-paying stocks into your portfolio.

The information in this article reflects the opinion of the author and not necessarily the opinion of Portfolio Resources Group, Inc. or its affiliates.

Aaron Katsman is the author of Retirement GPS: How to Navigate Your Way to A Secure Financial Future with Global Investing.; [email protected]

Related Posts

Leave a Reply

Your email address will not be published. Required fields are marked *