Some Things Get Better With Age

Some things get better with age. Wine, whiskey, a properly humidified cigar…

Other things… not so much. Take my knees and rotator cuffs, for example. Against all better judgment, I joined an over-40 men’s basketball league, and we had a game last night. We won… and it was a blast. But I’m really wishing I had iced my knees and shoulders after the game. I’m feeling it this morning.

It was worth it. But rather that focusing on my decrepit knees, I’d rather add other item to the list of things that actually get better with time: dividend growth stocks.

I enjoy a high yield as much as the next guy. But focusing exclusively on yield exposes you to the very real risk of losing ground to inflation over time.

The Fed’s goal is to keep inflation at around 2%. Now, we could split hairs about their calculation methods, and I think it’s fair to say that the “real” inflation rate experienced by most Americans is significantly higher than that. But let’s be generous and pretend the Fed’s 2% inflation target is reality.

Like interest, inflation compounds. So, over 10 years at 2% inflation, your purchasing power will decline by 22%. Over 20 years, it’s nearly 50%.

We’re talking about losing half your purchasing power over 20 years… even under a wildly conservative estimate of inflation.

So, bonds, preferred stock and high-yield (but no-growth) dividend stocks might pay you a fantastic income stream today. But over the course of a retirement, you run the real risk of having your retirement standard of living degraded.

Now, let’s compare that with a proper dividend growth stock.

Realty Income (Ois a REIT specializing in high-traffic retail. Think the local gas station or pharmacy.

The REIT generally raises its dividend 4% to 5% per year, and it’s working on a string of 89 consecutive quarterly dividends hikes.

Realty Income is not a particularly high yielder at today’s prices. It’s dividend yield is a modest 3.8%. But let’s imagine you bought the REIT five years ago. Your yield on cost (or the annual dividend today divided by your original purchase price) would be a much more attractive 5.7%.

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Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not ...

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