How to Supercharge Your Dividend Income to Beat High Inflation

By TradeSmith Editorial Staff

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In Tuesday’s TradeSmith Daily article, I warned you that rising volatility and heightened uncertainty are big headwinds for stocks. And it could undermine your retirement savings plans if you’re not careful.

Russia’s ongoing invasion of Ukraine has certainly raised the stakes, but volatility has been on the rise since last year. That’s when consumer prices began to accelerate at the fastest rate in decades.

And the conflict in Europe will push prices even higher in the months ahead. Just look at how fast prices at the pump have surged.

Today I’m talking about healthy stocks that benefit from higher inflation. And stocks with pricing power that offer you inflation-protected dividend yields.

I realize plenty of investors think about dividend stocks as B-O-R-I-N-G. But based on stock market history, that’s simply not the case.

In fact, the last time inflation was a problem, during the 1970s, dividend-yielding stocks saved many investors from what was otherwise a “lost decade” with little or no upside price appreciation for the S&P 500.

Dividends aren’t just nice for providing extra income. They’re absolutely essential to consistently making money from the stock market overall.

That’s especially true in times of rising prices. Stocks that consistently increase their dividends outperform the market by a wide margin during periods of higher inflation.

The chart above shows the power of dividend-paying stocks to outperform inflation. In the past, stocks with the highest dividend-growth rates (above, at far right) outperform the S&P 500 by 3% per year on average.

Dividends alone have accounted for 40% of the total return from stocks over the past 90 years. Most investment advisers will tell you there are only two ways to make money in the stock market:

  1. Upside price gains in the stocks you own.
  2. Cash dividends from stocks that grow their dividend payouts.
But you have to be careful. Many investors simply flock to stocks with the highest dividend yields, thinking stocks paying more is automatically better. But that’s not always true.

High dividend yields can be a red flag telling you the payout could be unsustainably high. A stock’s yield may look juicy, but the company may be in financial trouble, with falling sales or profits.

If that’s the case, the company is likely to cut back its dividend payout, or completely eliminate it before long.

Research clearly shows that companies that reduce or cut their dividends entirely underperform the stock market by as much as 20% to 25%. So, you do not want to fall into the high dividend yield trap.

Our TradeSmith Finance tools can help you zero in on some of the best dividend-paying stocks in the market. Using our exclusive Dividend Growers strategy (available in the Ideas Lab screener), members can screen for stocks with consistently growing dividend payouts in recent years.

Yesterday, I ran our Dividend Growers screen to look for stocks that could be good inflation-proof buy candidates. Though there were plenty of quality, dividend-paying stocks, one stood out to me as a good example.

Walgreens Boots Alliance (WBA), the iconic American pharmacy chain, is in the Green Zone in a healthy state. Plus, the stock offers investors a 4% dividend yield. That’s more than twice the yield for the average S&P 500 stock. And WBA has increased its dividend each year for the past 46 straight years.

Aside from meeting our strict criteria as a top Dividend Grower, WBA also qualifies for five other TradeSmith strategies, including Low Risk Runners, Best of the Billionaires and Sector Selects. This tells me the stock has plenty of upside potential.

Quality, dividend-paying stocks are a great way to beat inflation. But they aren’t the only way to earn consistent cash income from the stock market.

In fact, dividends aren’t even the best way. There are proven ways you can create your own dividends from stocks.

In fact, most investment advisers are wrong. There are really four ways to earn money from the stock market, not just two.

Dividends and price appreciation are important, but there are two more ways to make the stock market consistently pay you more money.