"No man can become rich without himself enriching others"
Andrew Carnegie

Tuesday, April 23, 2013

The Best Way to Beat Inflation

McDonalds - alittle out of place!
McDonalds - alittle out of place! (Photo credit: Steve Webel)
By Wealthy Retirement

Boca Raton, Apr.23, stock market trading .- It's funny. I still get shocked at how expensive life has become. I'm not even talking about the huge expenses I'm going to face in the coming years like college tuition and healthcare.

Rather, it's the everyday items that amaze me.

I'm taken aback when I have to pay $9 for a sandwich, $2.50 for The New York Times at an airport or $250 each month for my family's cellphone service.

And although the prices of gold, copper and other commodities have plunged lately, I don't expect life to get any cheaper.

The Problem...

Officially, inflation is low. It's just 1.47%, according to the data released last month. However, that number doesn't represent what's going on in the real world.

Over the past two years, the price of gas is up 43%. A pound of tomatoes is now twice as expensive as it was in early 2011. And a dozen eggs costs 12% more.

Clearly, it's more expensive to live.

That means retirees who live off pensions and investments need to figure out a way to give themselves a raise every year. If not, they'll suffer a decrease in buying power. And unless they're very wealthy, that means they'll have to lower their standard of living.

Following decades of working and raising a family, the last thing we want to do in our retirement years is buy the cheaper cut of meat or limit how many times a month we go to the movies.

After a lifetime of sacrifices, retirement is about freedom... not pinching pennies.

So how do you ensure the money you saved for retirement will maintain or even increase its buying power over the years?

Unfortunately, there are not many options.

Treasuries, while safe, pay nothing. Locking up your money for 10 years to receive a 1.72% yield isn't going to get you anywhere you need to go.

You could swing for the fences and buy some penny stocks. If your stocks hit, you'll make tons of money and have nothing to worry about. But more than likely these stocks will fall and you'll lose precious money that you need to sustain your lifestyle.

The Solution...

Fortunately, there is a solution that will increase your buying power. It is conservative and has proven to work over decades.

In order to grow your buying power and live comfortably in retirement, you must own Perpetual Dividend Raisers. These are stocks that have a proven track record of raising their dividend every year.

Owning a stock that raises its dividend by 10% per year is like getting an annual 10% raise. It's more than enough to keep up with inflation.

And if you get that 10% boost, year after year, the growth compounds.

Here's what I mean. Let's say you own $25,000 worth of a stock with a 4% yield that generates $1,000 worth of income in the first year you own it. The company raises the dividend by 10%, every year.

In the second year, you'll receive $1,100.

But in the third year, you won't receive an extra $100. Because you're now getting 10% on $1,100, you'll receive an additional $110 for a total of $1,210.

In the fifth year, you will get paid $1,464, good for a 5.9% return on your original investment.

And at the end of your first decade of ownership, you're up to $2,357 in income - that's 9.4% of your initial stake.

Here's Proof

Keep in mind, this kind of investment is likely in a conservative household name, not some speculative stock or junk bond. For example, let's look at McDonald's (NYSE: MCD), which I wrote about last week.

If you bought shares of McDonald's 10 years ago, you would have paid about $17 per share. At that time, the dividend was $0.40, for a not-terrible yield of 2.3%. Since then, the company has raised its dividend every year and now pays $3.08 per share for a fantastic yield of 18.1% on the cost 10 years ago.

Without question, a yield of 18% whips inflation and increases your buying power. And chances are, the dividend will be raised next year, like it has been for the past 36 years.

Just as appealing, stocks that see their dividend increase several multiples over the years tend to have rising stock prices. After all, you don't see many conservative household name stocks with 18% yields. Instead, the market pushes the stock higher to provide a more common yield.

That's exactly what happened to McDonald's. The stock is up sixfold over the last decade, which is why it still yields a respectable 3% at today's prices.

This method of investing has worked for decades. But because it's not exciting, you don't hear a lot about it.

People at cocktail parties don't boast about their holdings in Colgate-Palmolive (NYSE: CL). Yet, including dividends, Colgate's total return of 163% over the last decade beat the S&P 500's return of 113%. In real-world terms, that means if you invested $10,000 in each, you'd have an extra $5,000 from Colgate Palmolive.

That's a big difference.

Stocks of companies that raise their dividends every year typically outpace the broad market in good times as well as bad. And they have since at least the 1930s.

If you want to beat the inflation boogeyman, the method is simple.

Buy great companies that grow their dividends every year and hang on. You'll have more money in your pocket and you'll never have to worry about inflation. ...
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