What Is Inflation and How To Beat It

One of the concepts that you need to understand if you want to enjoy a successful financial future is that of inflation. Inflation is a mostly-silent budget buster. You may not always notice it in the short-term, but in the long-term, inflation can reduce your real wealth and affect your ability to retire in comfort.

What is Inflation?

Simply put, inflation is a reduction in your spending power. It is represented by a drop in the value of the dollar via a rise in prices. When inflation is in effect, it takes more of your money to buy the same thing you bought for less previously. Think about how much a candy bar cost when you were younger. Now, think about how much more it costs now – and how much smaller it is, too! That’s inflation at work.

Over time, inflation erodes your earning power. $10,000 today doesn’t go quite as far in terms of buying goods and serves as $10,000 did 20 years ago. And, in another 20 years, $10,000 will buy even less. You need to prepare for the reality of inflation so that you don’t find yourself struggling due to your reduce spending power.

Beating Inflation

Like so many things related to financial planning, inflation is expressed as a percentage. Inflation might rise at 3% or 4% rate, annualized over the next 30 years. This means that your money needs to grow with at least the rate if you expect to keep your earning power intact. If you want to improve your earning power, your money needs to grow at a rate that beats inflation.

One of the reasons that investing is considered so essential to retirement success is that it provides the opportunity to beat inflation. Stocks, even if they return an annualized 5% or 6% (a very conservative estimate) are still likely to manage to beat inflation over time. There are bonds, like I-bonds and TIPS, that are pegged to inflation and return more as inflation increases so that you keep pace with price increases.

As you might imagine, though, cash products don’t offer much of a chance for you to beat inflation. Right now, you are lucky if a high yield savings account offers 1% APY. Over time, such low yields result in you actually losing money in real terms, since inflation overwhelms your gains and erodes your buying power.

As you consider your future, and as you plan for retirement, make sure that you include investments that are likely to help you beat inflation. There are less risky investments, such as dividend aristocrats and index funds, that can increase your chances of beating inflation and seeing a prosperous future.

XOM Surpasses ATT as the Top Corporate Dividend Payer

Exxon, the company that was the most valuable company in the world until being recently surpassed by Apple, has announced a quarterly dividend increase. The oil giant is boost its quarterly dividend from 47 cents per share to 57 cents per share, representing an increase of 21 percent. With the new increase, XOM is now paying $2.28 per share annually.

The news means that Exxon is now the largest corporate dividend payer. This latest raise brings XOM up to a payout of $10.75 billion per year, topping AT&T’s $10.44 billion. ATT was previously the top dividend player. Apple’s dividend amounts to $9.88 billion to its shareholders a year. AAPL recently announced that it will begin paying a dividend to much fanfare and expectation. XOM is hoping to attract more investors as it continues to develop its resources and business.

Other Dividend News: AWRE, NPD, LFGP

This week also saw the announcements of some special dividends. Rather announcing dividend increases, Aware and Nepstar both announced special cash dividends to be paid out:

  • Aware: AWRE is a provider of DSL service assurance, as well as a company that supplies biometrics software. A special dividend of $1.25 per share is going to be paid out on May 25, 2012. You must be a shareholder of record by May 11 in order qualify for the payout.
  • Nepstar: China’s largest retail drug store chain is also announcing a special cash dividend. NPD is offerin 60 cents per American Depositary Share, to be paid out around June 7, 2012, to shareholders of record on May 7.

In addition to these special dividend payouts, Ledyard Financial Group is announcing a dividend increase. LFGP plans to pay 33 cents a share each quarter, up two cents a share from the previous payout. Shareholders of record on May 11, 2012 can expect the payout on June 1. LFGP is actually bought and sold through OTC Markets, sanctioned by the NASD.

Dow Jones – New Dividend List Added

This week we have added a new dividend list for our top dividend members – dow jones dividend stocks. Most investors are very familiar with this index and the stocks that it includes but we wanted to make the dividend data for each of these companies available to our members. We also added the number of consecutive dividend increases for each of these stocks.

Interesting Numbers

While the Dow is often thought of as a slow moving index we found some interesting numbers that are worth sharing. All stocks in the index pay a dividend, although some have a very small yield. 9 of the 30 stocks listed have a negative return over the last 12 months. Only 10 of the 30 stocks have a dividend yield over 10% and 16 of the companies have increased its dividend for 5 years or more.

The average yield of the index is 2.6%. About half of these stocks have a DSO rating of 90 points or higher based on yield, relative performance and dividend growth.

The main reason we created this list is that we know many investors turn to the Dow 30 Index to find dividend stocks to invest in. We hope this list can be a quick data resource for anyone looking for information on Dow Dividend Stocks. As always, consult a financial advisor before making any stock market decisions.

3 Upgrades to Watch

Earnings season is here and so far companies have been turning in pretty solid results.  82% of companies that have reported earnings for Q1 2012 have beet the street’s expectations.  We found 3 high yield stocks that have a yield of 2% or more and were upgraded in the last week.  We have listed the reason for the upgrade and the new price target when the investment firm made it available.

View all Dividend Upgrades and Downgrades for this month here:

Dividend Upgrades & Downgrades

Safeway (SWY)

Safeway was upgraded by Deutsche Bank from a Sell to a Hold on April 19th with a price target of $22 per share.  Deutsche Bank said that while they still have concerns over Safeway’s fundamentals they expect the recent management changes and widening CDS spreads to put a floor in the stock. Safeway has a dividend yield of 2.6% and a payout ratio of 39%.  The company has increased its dividend for 6 years and has a 5 year dividend growth rate of 20.3%.

QR Energy LP (QRE)

QR Energy was upgraded by Robert W. Baird from Neutral to Outperform on April 16th with a price target of $24 per share. Baird upgraded QR Energy following the 11.3M unit equity sale by sponsor entity Quantum. The firm believes the sale removes an overhang and that shares are attractively valued. QRE has a dividend yield of 10.1% but because it is a limited partnership we are not focused on the payout ratio.  QR Energy started paying distributions in 2011 and has increased the dividend in 2012 by over 40%.

Linear Tech (LLTC)

Linear Tech was upgraded by Longbow from Neutral to Buy on April 16th.  Longbow set a price target of $40 but the reason for the upgrade was not available. LLTC has a dividend yield of 3% and a payout ratio of 45%. The company started paying dividends in 1992 and has increased its dividend every year since.  It has a 5 year dividend growth rate of 9.1%.

Are You Expecting Too Much from Your Portfolio?

When people start investing, many of them have this idea that riches are just around the corner. By investing in a “hot stock,” they think that they will be able to see huge returns and strike it rich in a matter of months.

This isn’t the only erroneous expectation that many have for their portfolios, though. Dreams of huge annual returns over time lead some to think that putting in a hundred dollars a month with dollar cost averaging will lead to a nest egg a million dollars when they decide to retire.

While it’s true that investing can help you build wealth, and it can be an efficient way to see greater returns over time, it’s important to realize that you need to have realistic expectations. Your expectations for returns are likely higher than you can truly expect to receive. If you don’t want an unpleasant surprise down the road, it’s important to temper your expectations.

Sustainable Gains Take Time

First of all, it’s important to understand that sustainable gains take time. If you don’t have a huge amount of capital (and even if you do), you aren’t going to see big returns for your money in a short period of time. You will only be buying what you can afford, including partial shares, so building your portfolio is the work of years.

You can’t start investing right now and expect to see massive gains immediately. And you also have to realize that the likelihood of timing the market just right to enjoy great investment success is more about luck than anything else. Expecting that your investing genius is going to result in big gains is unrealistic.

You Probably Won’t Average 10% Returns Over Time

We always hear that we shouldn’t rely on past performance to predict future results, but we like to historical precedent anyway. Many predict “conservative” returns of 7% to 8% on a stock-heavy investment portfolio, but are quick to say that the annualized return is historically closer to 10% or 11%. This means that many people assume that they are going to receive 10% returns on their portfolios.

Sadly, this just isn’t very likely when you look at the volatility in the markets right now and the changing macro outlook. When making plans, many people plug in 8% to 10% returns into the online calculator. They are comfortable putting $200 in each month, and think that their retirement accounts will grow to what they need in 30 or 40 years. If you do end up with 10% interest, you could see more than $1 million at the end of 40 years. But what if you are only 7% interest ($480,000), or 5% interest ($290,000)?

That’s a big risk to take. If you want to find success, it’s important that you step back and double-check your perceptions. Try for a more realistic view of what will happen with your portfolio, and realize that you need to temper your ex

Russian Power Producers Continue to Raise Dividends; TRV, K

Once again, Russian power producers are in the news for expected dividend increases. Last week, the big Russian dividend news was Gazprom. However, this week companies Surgutneftgaz and RusHydro are announcing increased dividend payments for 2011.

Surgutneftgaz is an oil producer, and expected to raise its dividend after the directors meet. The company has been attracting plenty of foreign investment due to its regular dividend increases. However, some think that the dividend increases are unsustainable, since the output isn’t expected really shine in 2012.

RusHydro, the largest hydropower producer in Russia, is looking at increasing dividends over the next three to five years. A definitive dividend for 2011 hasn’t been announced, although it is expected that the level will be at least that seen for the 2010 payout.

Other Dividend Increases: TRV and K

Underscoring the recovery in the financial industry, Travelers insurance beat expectations. Revenue rose, and Travelers expects reasonable results this year. As a result, TRV announced a dividend hike from 41 cents per share to 46 cents per share. The company reported that premium revenues increased, and that most of the losses due to payouts were related to tornadoes in the Midwest. But the healthy revenue, and the dividend increase, are contributing to an improvement in the perceived value of Travelers.

Cereal giant Kellogg Company is also increasing dividend payouts. K announced that it will increase the dividend from 43 cents per share to 44 cents per share at the beginning of the third quarter of 2012. However, K is paying out a dividend this quarter, and has paid consecutive dividends since 1925. This long-standing tradition is one of the reasons Kellogg is in the old guard of dividend paying stocks. Kellogg used to be a dividend aristocrat, but fell off the list after a failure to raise dividends one year. Since 2005, K has been trying to re-establish its cachet as a dividend stock, and growth dividend stock.

Top 10 Nasdaq Dividend Growth Stocks

Last week we wrote about our top rated Nasdaq Dividend Stocks.  Our DSO rating system is a great resource to help investors identify potential dividend investments but many income investors focus on dividend growth.  Dividend growth maintains yield as a stock price increases and drives total return on investment.  Below are the top 10 Dividend Growth stocks that trade on the Nasdaq.  Each of these stocks has a 5 year dividend growth rate over 10% and has increased its dividend for at least 5 years or more.

1. Lake Shore Bancorp (LSBK)

Lake Shore Bancorp is a savings and loan holding company that has increased its dividend for 5 consecutive years.  It has a dividend yield of 2.8% and a 5 year dividend growth rate of 56.32%.  The company has a 3 year net income growth rate of 35.78% and a payout ratio of 43.

2. Tower Group (TWGP)

Tower Group is a general insurance company that has increased its dividend for 5 years and a dividend yield of 3.53%. The company has a 5 year dividend growth rate of 47.05% and a 3 year net income growth rate of 1.56.  The company has a payout ratio of 46.77.

3. Alliance Holdings (AHGP)

Alliance Holdings, Limited Partnership, is a coal company that has increased its dividend for 5 years and has a 5 year dividend growth rate of 46%.  AHGP has a dividend yield of 5.77% and a 3 year dividend growth rate of 38%.

4. Healthcare Services Group (HCSG)

Healthcare Services Group is a services related company that has increased its dividend for 8 years and has a 5 year dividend growth rate of 25%.  HCSG has a dividend yield of 3% and a 3 year income growth rate of 12.7%.  The stock has a high payout ratio of 110 which might signal a dividend cut in the future.

5. Hasbro (HAS)

Hasbro is a children’s toy company that has increased its dividend for 8 years and has a 5 year dividend growth rate of 20.6%.  HAS has a dividend yield of 3.3% and a 3 year net income growth rate of 7.9%.  The stock has a payout ratio of 41%.

6. Xilinx Inc (XLNX)

Xilinx is a integrated circuit producer that has increased its dividend for 7 years and has a 5 year dividend growth rate of 17.9%.  XLNX has a dividend yield of 2.16% and a 3 year net income growth rate of 19.7%. The stock has a payout ratio of 34.75.

7. National Research Corporation (NRCI)

National Research Corp is a healthcare analytics company that has increased its dividend for 6 years and has a 5 year dividend growth rate of 17%.  NRCI has a dividend yield of 2.1% and a 3 year net income growth rate of 15.8%.  It has a payout ratio of 52%.

8. Automatic Data Processing (ADP)

Automatic Data Processing is a business outsourcing company that has increased its dividend for 36 years and has a 5 year dividend growth rate of 14.8%.  ADP has a dividend yield of 2.7% and a 3 year net income growth rate of just .5%.  The stock has a payout ratio of 54%.

9. Intel Corp (INTC)

Intel makes processors for PCs, tablets and smartphones and has increased its dividend for 8 years and has a 5 year dividend growth rate of 14%. Intel has a dividend yield of 2.8% and a 3 year net income growth rate of 34%. It has a payout ratio of 32%.

10. Alliance Resource Partners (ARLP)

Alliance Resource Partners is a U.S coal producer that has increased its dividend for 9 years and has a 5 year dividend growth rate of 13.5%.  ARLP has a dividend yield of 6.5% and a 3 year net income growth rate of 42%.  It’s a Limited Partnership so there are very specific tax implications to consider before investing.

Google Stock Split and Dividend; DOW, OGZPY, JPM

Today’s big news is that Google announced huge earnings for quarter one of 2012. GOOG is yet another tech company with plenty of cash, and investors interested in getting access to some of it. After AAPL’s decision to pay a dividend to its shareholders, there wasn’t much else Google could do to stave off its own investors’ demands.

As a result, GOOG has announced a stock split that really sent the financial world buzzing. Google will create a class of nonvoting shares that will allow shareholders to get a bonus of a new share of stock, but voting won’t be diluted. On top of the stock split, GOOG has also announced that it will pay a dividend as well. This is big news for those who are interested in adding GOOG to a dividend portfolio.

Other Dividend Hikes: DOW, OGZPY, JPM

There are a couple other dividend hikes of note. Dow Chemical and Gazprom both announced dividend hikes this week:

  • DOW: Dow Chemical announced that it would raise its quarterly dividend by 28 percent. The news comes after DOW announced that it would close plants around the world and get rid of 900 jobs. The new dividend is 32 cents per share, up from 25 cents per share.
  • OGZPY: The cheapest Russian stock traded in the United States, natural gas giant Gazprom, saw a bit of a boost today after announcing that it might pay a record dividend for 2011. The recommendation is that the dividend double to the equivalent of about 30 cents a share, which is much larger than what it has been in the past.
  • JPM: Profits might have slipped for JP Morgan Chase, but revenues are well up, and the company feels confident about raising its quarterly dividend. The dividend will be 30 cents a share, up from 25 cents a share. On top of that, JPM plans a stock buyback that will amount to $15 billion. The news has many wondering if other banks will be able to follow suit.

Higher Dividend Taxes on the Way; Oil-Field Dividends

This week there has been a lot of talk about President Obama’s 2013 budget changes. One of the changes listed in the current incarnation is for the special tax rate for dividends to disappear starting on January 1, 2013. Right now, dividends are taxed much the same way that capital gains are taxed — with a top rate of 15%.

All of that could disappear if the special rate for qualifying dividends disappears and dividends revert to being considered ordinary income. With the schedule demise of the Bush tax cuts on the table, the top rate could also go up. This could mean that you could see more of your dividend income taxed. Many are already concerned about the state of affairs, since some consider dividends to already be double-taxed — companies pay taxes on the money before paying the dividend, and then dividend recipients pay taxes on what they receive. With dividend taxes likely to go up, this only compounds the problem.

Oil-Field Service Companies Offer Interesting Dividend Opportunities: EXH, CLB, RES

As energy becomes a hot topic, oil-field service companies are providing different opportunities to earn dividends. Some of the companies receiving attention for their dividends right now in the oil-field services include:

  • Exterran Holdings, Inc.: EXH has been paying a very high yield recently (although that could end, since the payout exceeds the earnings).
  • RPC: RES features a good dividend growth rate, but the company might have a hard time maintaining its growth rate over time. The upside to RES is the fact that the company keeps its debt low, and its profit margins higher than average.
  • Core Laboratories: CLB is another company with red-hot dividend growth. The company offers oil reservoir management services, and claims to innovate enhancement products. CLB could provide solid dividend earnings in the future, if it can maintain.

In the end, you do need to do your research. These types of companies are rarely thought of, but they can offer opportunities.