Income stocks are not the answer to inflation, research shows

Income stocks are not the answer to inflation, research shows

Income stocks have not delivered superior inflation-adjusted performance during periods of high inflation or rising interest rates, research has shown.

Investors can put themselves in a better position to achieve their financial goals by staying disciplined, diversifying broadly, and considering strategies designed to outpace or hedge against inflation and rising rates, Dimensional Fund Advisors has said.

In a research report, Mia Huang, a senior associate in the company’s research team, looked at whether dividends can help combat high inflation.

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She looked at the performance of US companies formed on a dividend yield between 1928 and 2021.

Each year, companies were divided into “payers” and “non-payers” depending on whether they had paid a dividend during the previous 12 months. 

Dividend payers were then divided into the top and bottom 30 per cent of payers.

Average annual returns of dividend portfolios in high-inflation years, 1928-2021

Source: Dimensional Fund Advisors

The research showed that all four dividend portfolios had positive nominal and real average returns in years of high inflation (above 5.5 per cent annually).

Therefore, Huang said, outpacing high inflation over the long-term is not an unique advantage of dividend-paying stocks.

“In addition, the return differences between payers vs. nonpayers and high payers vs. low payers are not reliably different from zero,” she said, therefore she saw no strong evidence that dividend-paying stocks deliver superior inflation-adjusted performance during high inflation periods.

While it is natural to be concerned about the potential impact of high inflation and rising interest rates on portfolios, she said, there is no reason to expect dividend-paying stocks or high dividend payers to offer more protection and higher returns during these periods. 

“Market prices reflect the aggregate expectations of all market participants, including expectations about inflation and interest rates. 

“Staying disciplined and broadly diversified, instead of chasing dividend stocks, may put investors in a better position to achieve their investment goals.”