Since I started investing in Dividend Growth Stocks, the fact that dividends protect from inflation was a common theme in the specific literature I was reading, but I never thought of putting it to the test.
That was until this interesting times that we are living now came upon us, where inflation in US is at it's 40 years high.
Since it is easily available, I've collected historical data on S&P dividends (source) and historical data on inflation (source) and used as the basis of my calculations.
Here you can see the relationship between dividend growth and inflation growth by decade:
It looks like dividend growth kept up with inflation every decade, with the exception of the 70's where it trailed slightly behind.
This got my thinking of looking at what happened during the 70's and why this anomaly. It looks like the period with high inflation in the US was in the period 1966-1981, so this somewhat explains why.
Since the objective of Dividend Growth Investing is to build a reliable income stream that retains purchasing power I went through a worst-case scenario
What if I retired in 1966 and was living of my dividends income stream?
Here you can see the results of this scenario:
This shows that there were periods when I would have lost around 20-25% of my purchasing power.
Personally this does not look that bad, considering the period I decided to age and retire in :)
Yes, I would probably have to cut some expenses but it not as tragic as the high-inflation environment this scenario lives in.
On the other hand, looking at the results on a price basis, the story looks very different:
It would be hard to imagine holding stock that could buy you $10k worth of goods in 1966 and being force to sell it to buy half of those goods in 1974.
Luckily we don't need to imagine this, because we are Dividend Growth Investors!
Of course the S&P used here is used as a proxy, mine/your portfolio could contain very different stocks, but it does prove (at least for me) that dividends retain purchasing power.
If anyone wants to play with different periods, you could easily use the Google spreadsheet I use, you can access it here