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.

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.

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

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.