Dividends have risen steadily since the 1960s. Maybe because of inflation, maybe because of the end of the gold standard, maybe because of changes in industries.

As an investor, I buy stocks in companies that sell goods and services to consumers and make a profit in the process. Many of these companies have competitive advantages that enable them to pass on sustainable cost increases to end customers through price increases.

That means stocks could offer good inflation protection. As companies grow their profits, they can pay more to shareholders in the form of dividends. In other words, dividends tend to generate a stream of income that protects against inflation.

I’ve looked at the data for S&P 500 dividends since 1960 to test this hypothesis. (Source)

I also received data on annual inflation in the United States. (Source)

It appears that dividends have outpaced inflation for every decade since 1960. The exception is the 1970s, when dividends lagged slightly behind inflation. However, share prices lost significant ground due to inflation.

I tried to look at it by breaking it down by years. The period of high inflation in the United States was between 1966 and 1981, when inflation was only just above dividend growth. But if you paid dividends, you could largely maintain your standard of living.

It looks like there have been a few years when dividend income, adjusted for inflation, was lower than 10 years earlier (1975). In other words, purchasing power decreased by 25% by 1975 compared to 1965. From then on, however, she recovered.

However, if you look at real stock prices between 1965 and 1981, the picture looks much worse. The inflation-adjusted stock price, as reported by the S&P 500, fell 50% between 1965 and 1975 and stayed there until 1981 – it could buy half of what you could buy before.

I don’t have any data on bonds, but interest income definitely lost purchasing power even faster.

Overall, dividends offered good inflation protection. While dividends offer good protection against inflation over time, this may not apply for every single year. The period from 1965 to 1975 shows this clearly.

The question to me is, how would that affect me if I retired and lived on dividends between 1965-1975? I would probably have to look for ways to cut spending in some areas and not in others. The nice thing about it is that my personal shopping cart with the goods and services used is different from the shopping cart that is measured with CPI.

I can always try to adjust my expenses and budget. For example, if travel was a big expense, I may spend less time traveling to expensive destinations like Paris or France and going to cheaper places. I can change brands or stock up on certain items earlier in the year. Of course, certain expenses like healthcare are also more difficult to manage and forecast.

Also, while I’ve used S&P 500 Dividends as a proxy for dividend income in general, this is just a proxy. The portfolio of companies I would have invested in could have generated dividend income that offered better inflation protection (although it could have been worse if chosen wrongly). Not all S&P 500 companies are dividend growth types, however. The index contains many cyclical stocks like US Steel or General Motors, which tend to cut dividends during recessions and are not dividend growth stocks. I tend to turn my attention to the companies that grow their dividends annually and have already done so successfully. It also helps to analyze these companies to understand if they can keep growing their profits and dividends. A competitive advantage, a strong brand name and a leadership position are big pluses in my opinion.

If I turn my attention to companies that are growing their dividends every year, I have a better chance of growing my dividend income and protecting them from the ravages of inflation.

I received the historic dividends on three dividend growth stocks that I’ve been pondering about. I would argue that these are prominent large cap companies that have been prominent large and established companies for many decades, so it can be concluded that an investor would have had a chance to choose them 55 years ago.

Johnson & Johnson (JNJ), for example, managed to increase real dividend income by a factor of five in the period 1965-1981

Procter & Gamble shareholders also saw their inflation-adjusted dividend earnings grow gradually, albeit at a much slower pace than Johnson & Johnson.

Coca-Cola shareholders also saw their inflation-adjusted dividend earnings grow gradually, albeit at a much slower pace than Johnson & Johnson but faster than Procter & Gamble.

It looks like it pays to be selective when looking for dividend growth stocks that can grow dividends at or above inflation.

Thanks for reading. Please let me know your thoughts in the comments below.

Relevant Articles:

– A look under the hood on inflation

– Dividend growth stocks protect investors from inflation

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