Dividend Stocks, Inflation and Federal Reserve
September 23, 2022 | Sage Capone
- Remember to Zoom Out and Focus on The Financial Plan for The Long Run
- Stocks with Increased Dividends Tend to Outperform the Overall Market1
- Federal Reserve is Committed to Returning Inflation to 2% Objective
The headlines are impossible to ignore, and they make you second guess your investment decisions as you find yourself thinking about short-term fears that can cloud your overall financial goals. Investing in the market involves risk and volatility that causes investors to buy high and sell low. The investment plan needs to remain at the forefront as we stay diligent in the current bear market.
In the given market dynamics, edges of a portfolio can be tweaked but with due caution as we risk missing the rebound and the markets best days. Bear Markets are painful, and they make most investors’ emotions fortitude reach their breaking points. The market could get worse before it gets better but that should not change our investment plan for the long run.
Since 1926 the market has gone through large drawdowns, but over the long-term, the market historically has climbed. As illustrated in the photo below, an investment plan of $1,000 in 1926 would have grown to $14,088,112 by the end of 2021.
Source:Morningstar, National Bureau of Economic Research, and BlackRock, as of 12/31/21.Past performance does not guarantee or indicate of future results. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe. It is not available for direct investment.
Dividend Paying Stocks
According to Naveed Rahman, Fidelity Strategist, “during periods of high inflation, stocks that increased their dividends the most outperformed the broad market, on average. Based on history, if high inflation is here to stay, I believe dividend growth stocks look likely to outperform.”1
Naveed provides a snapshot of S&P 500 returns with price appreciation, dividend return and inflation. As you can see from the chart, dividend return has accounted for 40% of stock market return and 54% when inflation is high.
While the past is not indicative of future results and the best performing dividend stocks today may not be the same in the future. Dividend payments have the potential to help stocks total return when the market is experiencing volatility. Placing a portion of your portfolio in dividend paying stocks has the potential for a diversified portfolio with the opportunity for a higher return.
Bloomberg Financial L.P., Morningstar, and Fidelity Investments, as of 7/31/22. Past performance does not guarantee or indicate future results
Federal Reserve Update
The Federal Reserve, which is the central bank of the United States, raised rates to 3 and 3 ¼ this past week and they anticipate more increases in the future. As we view the Fed Actions to dramatically slow economic growth. We understand that the market is in a bear market and will continue to remain volatile. Looking ahead to Fed’s next two meetings of the year, markets are anticipating a fourth 0.75% increase in October and possibly in December.
(1) Federal Reserve Bank of New York. “Federal funds.” Fedpoints, August 2007.
(2) Board of Governors of the Federal Reserve System. “Monetary Policy“.
Automate Retirement Contributions
When you review your next contribution, don’t second guess the investment purchase and don’t be tempted to time the market. This behavior has the tendency to affect your long-term retirement contributions overall goals on Market Returns. See my article on 200+ years of asset class returns.
As always, please do not hesitate to contact Sage Financial Investments for a Free Strategy Review or Second Opinion to discuss your portfolio or re-visit your risk profile.
*Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. Investments and/or investment strategies involve risk including the possible loss of principal. For a complete description of investment risks, fees and services, review the Brookstone Capital Management firm brochure (ADV Part 2A) which is available from your Investment Advisor Representative or by contacting Brookstone Capital Management.