During uncertain times, some investors make big bets and risk everything. Silicon Valley Bank is a recent example. They invested in too many U.S. Treasury bonds, typically considered a very safe asset, lost their business, and nearly started a bank panic across the country.
There are a few lessons here:
- First, Silicon Valley Bank’s balance sheet was concentrated in short term treasury bonds (though this is a standard banking investment strategy).
- Second, even safe assets, like treasury bonds may be the wrong choice, if not properly diversified, in an inflationary and rising interest rate environment.
HCM Wealth Advisors was founded more than 30 years ago with the understanding that, to achieve and maintain financial independence in an increasingly complex retirement landscape, investors need income that is:
- In cash,
- Growing faster than inflation.
To help clients enjoy the benefits of predictable, growing income during retirement, HCM uses a dividend growth investment strategy. The current financial circumstances show that the strategy is just as valuable today as it was when inflation spiked in the late seventies and early eighties.
Market Volatility is Not the Enemy....Inflation is the Enemy
Stock market volatility steals the headlines. But volatility, in fact, is a good thing. It’s what allows equity investors to demand a rate of return beyond the risk-free rate, and therefore, above the rate of inflation. Inflation is the real enemy.
How Dividend Investing Fights Inflation
- From January 1,1960 through January 1, 2023, the Consumer Price Index rose from 29.3 to 299.17, an increase of nearly 10 times.
- Over the same period, the cash dividend of the S&P 500 went from $2.05 to $67.83, an increase of nearly 33 times.
- In 2022 alone, when the CPI (inflation) index for all items rose 6.2%, what did the S&P 500 dividend do? The cash dividend of the S&P 500 rose nearly 11% to a new record high.
Let that sink in for a moment…And let it remind us of the inflation-fighting power of a diversified stock portfolio.
Sources: S&P 500 prices and dividends: Standard & Poor’s, NYU Stern School. Inflation: U.S. Bureau of Labor Statistics, inflationdata.com