Dividend Compounding Can Protect Against Inflation

Pramit Ghose


Dividend Compounding Can Protect Against Inflation

Investment markets have become very short-term. While there was much angst around the January US CPI inflation number which came in more or less a consensus at 6.4%, there was less reference to the fact it was still a high inflation rate and that investors’ assets are under pressure in terms of maintaining purchasing power.


We are seeing a lot of new investor interest in early 2023 as cash deposits remain extremely low, and even only 4% inflation on average over five years sees a 22% loss in purchasing power.


Dividends and dividend growth have provided good protection in previous inflationary periods. The companies we hold in our Global Equity Income Fund continue to increase their dividends in 2023. Also importantly, despite their dividend growth, these companies are still attractively valued versus the overall equity market. We think more and more investors and institutional asset managers will seek out income producing companies in an environment of persistent inflation, heightened economic uncertainty, and overall market valuation levels that suggest capital growth could be constrained.


The ’power of compounding’ remains a strong incentive for longer-term investment thinking. Whereas 120 years (chart below) is a rather long-term horizon (although perhaps not so for family offices, charities and trusts), you get the picture that dividends are a significant part of overall equity returns over the longer-term.


Source: Prof Robert Shiller, Yale University


In fact, for a pension investor, 60 years is now the investment time horizon, if you factor in some 40 years of contributions while working, and 20 years post-retirement via an ARF.


In particular, during more inflationary periods (right hand side of chart below), dividend and dividend growth stocks have outperformed the overall equity markets.


Source: Robert Shiller, Goldman Sachs


And yet, despite these attractions and historical trends, dividend stocks remain inexpensive versus the non-income stocks – they just don’t seem to have the same ‘excitement’ as high growth potential companies (often non-profitable) for the shorter-term investor.


Source: Societe Generale


The overall valuation parameters of our own Global Equity Income portfolio for new and existing investors are, I believe, very compelling: a 2023 dividend yield of 3%, a 2023 price/earnings ratio of under 15x, and a Return on Capital of 20% (Source: Bloomberg).


Available as a UCIT fund with daily liquidity, or as a share portfolio.


Past performance is not indicative of future performance.


The value of your investment can go down as well as up.