How my portfolio could beat inflation this year | Smart Switch: Personal Finance

(Chuck Saletta)

At the end of 2012, I launched the Inflation Protected Income Growth Portfolio. It was a real money investment account dedicated to finding investments with the potential to increase their dividends over time to help fight inflation.

Due to low readership, the series of articles on that portfolio ended a few years later. However, since it was my real money invested in that account, I largely kept it invested with the same principles that launched the series in the first place. And even in today’s uncertain economy and market, it looks like the portfolio can perform as designed.

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A decent strategy with revenue growth potential

From the portfolio’s launch in December 2012 to June 30, 2022, its value increased from $30,000 to $101,738.14, more than triple in just under a decade. While respectable, his 239% total return during that time largely matched the 221% total return of the SPDR S&P 500 Index ETFa S&P 500-exchange traded fund tracking indexes, with dividends reinvested.

More importantly, however, the portfolio has largely met its key revenue growth design criteria. In fact, there’s a very real chance that the dividend-like income you generate in 2022 will be enough higher than the dividend-like income you generated in 2021 to outpace inflation. That’s true even with an 8.6% inflation rate trampling consumers’ daily purchasing power.

In 2021, that account generated $2,679.81 in dividend-like income. As of June 30, 2022, it has generated $1,454.38 so far this year. Assuming the subsequent half ends exactly like the first half, the projected $2,908.76 in dividend-like income for 2022 would be just over 8.5% higher than that received in 2021. While that is not Quite beating inflation, it simply assumes that the second half of the year will be like the first half. Instead, there is good reason to believe that it could be stronger.

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The three keys to portfolio success

The three key divers for optimism come from a combination of dividend growth, opportunistic reinvestment, and prudent portfolio pruning.

From a dividend growth perspective, several of the portfolio selections actually increased their dividends between March and June 2022. Elevator and Escalator Manufacturer Otis all over the world led the charge with a whopping 20.8% rise, though rail giant Pacific Union and its 10% increase didn’t hurt either. As a result, even if your dividends are flat for the rest of the year, that increase translates to more dividend income from July through December than from January through June.

And who says that the other companies in the portfolio have to keep their dividend payments static? cereal giant general mills announced a 6% increase in its dividend from July, and credit card specialist Financial Synchrony it will also increase its dividend by 5% for the second half of this year.

The portfolio was designed around companies with a track record of increasing their dividends, so it should come as no surprise that a number of them have been able to sustain the trend. Still, the best thing about having investments that earn cash dividends is that they give you cash to invest, without having to sell your existing holdings or make an additional deposit to your account.

It is an opportunistic reinvestment of that generated cash that allowed me to acquire shares of the industrial conglomerate. 3M in February of this year, after increasing its dividend for the 64th consecutive year. While my purchase didn’t hit the company’s first quarter dividend, that means the account will most likely receive more dividends from 3M in the second half of 2022 than it did in the first half.

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And finally, there is portfolio pruning. Although the account is based on companies with a history of paying and increasing their dividends, it is important to remember that dividends are never guaranteed payments. The account had shares in two companies: entertainment titan walt-disney and generic drug manufacturer Teva Pharmaceutical Industries — which eliminated its dividends.

Both have seen their businesses bounce back well enough that if they wanted to pay their dividends again, they could have. Disney, in particular, has made it clear that would rather reinvest than directly reward its shareholders with cash. Those companies, of course, are free to operate as they see fit, but their dividend eliminations and lack of restoration of those payments make them incompatible with a portfolio geared toward earnings growth.

As a result, I sold both companies and used the proceeds (plus some additional cash that had been accumulated from other dividend payments) to buy shares of the auto parts retailer. genuine parts. I received my first dividend payment from that purchase on July 1, which guarantees that the account will receive more dividends from that company in the second half of 2022 than in the first half.

It all adds up to the potential for revenue growth that outstrips inflation.

Add strong first-half dividend performance to the already-announced dividend stocks of several companies in this portfolio, and there’s a good chance their earnings growth will outpace inflation. at a time when inflation it’s in the the fastest pace he’s had in over 40 years and the the stock market is down over 20%, it’s good to know there is something with the potential to keep up the pace.

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Dividends are never guaranteed payouts, but with a combination of some dividend growth, opportunistic reinvestment, and prudent portfolio pruning, they can still deliver returns even today. With the market as low as it has been recently, now might be a good time to start looking for bargain prices on companies that pay dividends for a chance to keep up as well.

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Synchrony Financial is an advertising partner of The Ascent, a Motley Fool company. mandrel saletta He has positions at 3M, General Mills, Genuine Parts Company, Otis Worldwide Corporation, Synchrony Financial and Union Pacific. The Motley Fool has positions and recommends Walt Disney. The Motley Fool recommends 3M and Union Pacific and recommends the following options: $145 long calls in January 2024 at Walt Disney and $155 short calls in January 2024 at Walt Disney. The Motley Fool has a disclosure policy.