I’m sure you already feel the pinch at the checkout counter. That’s right, inflation is among us, slowly eating away at our wallets and savings. I have previously written a couple of articles on how to check for inflation and prepare for inflation. Now we are going to use everything we know about our passive income streams to beat inflation.
In today’s article, we are going to use our dividends to help us fight inflation. Let’s recap how we build our dividend portfolio; as I wrote in the article “How the Rich Buy Their Bling,” we will use our earned income to fund our dividend portfolio.
With the income from our jobs, we will pay our living expenses and retirement portfolios first; then, with the rest, we fund our dividend portfolio. We do not use remaining earned income as discretionary income…you’ve been lied to. For example, if we make $7,000/month in earned income, we have $3,000/month in expenses and $1,000 in a Roth IRA, then we invest the last $3,000 into our dividend portfolio.
Investing for Dividends 103: The Magic of Reinvesting
What comes out of the portfolio each month via dividends is our real discretionary income. For the most part, we want to reinvest our dividends to accelerate the compounding effect. However, we have a choice on how to take our dividends.
With inflation on the rise, it may be prudent to take some of our dividends to assist during these times of inflation. I didn’t truly realize how significant having dividends coming was until a few days ago when I talked to my wife over the phone (I’m stationed in Japan).
We talked about random stuff, and she mentioned how she noticed the price of meat has gone up considerably. She usually likes to make BBQ over some weekends, and she said that her favorite cut of meat had almost doubled in price.
Stock Market Investing 106: High Yield Alternative Investments
As we talked, I checked into her dividend portfolio (I manage it from time to time because I find it infinitely more entertaining than she does). I realized that she has about $120 sitting in her Wells Fargo dividend portfolio cash balance. Money from the cash balance can be transferred out just like a checking account.
I asked her if she wanted to take some cash out, but she said she was fine, just leave it there for now. That $120 had accumulated over the last 4-5 weeks of dividend payments. You can see below how the dividends keep rolling in.
The best part is we can choose how we use our dividends. We are fortunate enough to both have excellent jobs and multiple income streams coming from many different asset classes, so we have many options.
For this month, I accumulated $350 in dividend payments across my five different brokerage accounts. I ended up reinvesting all of these, but I kept them in my cash balance to see how inflation would affect me through the month. As things remained normal, I invested the cashback in making more cash next time.
4 Steps to Become Rich
Which dividend-paying securities can beat inflation? How you choose to beat inflation is entirely up to you.
Pure Growth. You can beat inflation by investing in a growth stock that will increase in price over time. Growth stocks are not known to grow exceptionally well during inflationary periods—be careful. A couple of senior growth stocks are Google (GOOG) and Facebook (FB). You will see your money (hopefully) growing faster than inflation via capital gains.
Heavy Growth/Light Dividend. You can beat inflation with an old-growth stock that also pays a very light (0.5%-1.5%) dividend. These little dividends grow over time as the company matures. You should see capital gains and dividend growth over time. These are perfect stocks to reinvest dividends old-growth to maximize compounding. Stocks like this are Microsoft (MFST) and Visa (V).
Medium Growth/Medium Dividend. Most of these stocks are the “blue chip” companies increasing and paying dividends over many, many years. The dividend yield is usually about 2-3%, and the company still grows over time. These are other companies that reinvest dividends. These companies include Lowes (LOW), Home Depot (HD), McDonald’s (MCD), and Johnson & Johnson (JNJ).
Investing Insider vs. Outsider
Light or No Growth/Heavy Dividend. These companies have been around for a while and usually have a lot of debt. They have to acquire companies or assets to remain competitive. You can reinvest dividends or take dividends to reinvest into faster-growing companies. Some companies that come to mind are AT&T (T) and Verizon (VZ).
Bond Funds. Bonds are an excellent way to stay consistent with inflation. My bond funds yield 3%, but I could get them at a discount during a sell-off—thus increasing my yield. I may break even with inflation; however, bonds are safer than other securities. You pay for safety. I also have high yield junk bonds as well, that yield 5%. These funds are Long-Term Bonds (BLV) and High-Yield Bonds (JNK). I would take cash from these first.
High-Yield Securities. Lastly, we have high-yield securities. The main reason to buy high-yield products is for current cash, perfect for times like these. These products yield anywhere from 7-10% and give you consistent money for daily use. On the 1st of the month, I have $60 coming in from a couple of Closed-End funds. I look forward to these more than my big military paychecks. My favorite closed-end funds are Pimco Dynamic Fund (PCI) and Nuveen Municipal Bond Fund (NVG, and it is tax-free).
Defeat inflation. Now you have to defeat inflation. Hopefully, you have kept a tight budget of your spending habits. As you notice products increasing, decide if there are alternatives. We still have to exercise some judgment.
Cash Flow 105: Diversify Your Passive Income
Dividends and stocks, in general, are a great way to hedge against inflation. If you are taking your time and buying stocks at suitable times, you should be getting good capital appreciation and large dividend yields. You make your profit when you buy, not when you sell.
However, having the extra assistance of dividends can help you through what will be a rough time. As inflation sets in, do not lower your investing habits to beat it. You must keep your investing consistent and try to reduce expenses elsewhere.
Capital Gains vs. Dividends
It may be challenging, but getting an excellent portfolio of dividends is the goal. My wife and I are up to nearly $500/month in dividends and other passive income sources that I will cover later. This money gives us a warm blanket and is like having a partner that is just giving us cash profits.
Take the time to reflect on where you are in your dividend journey. I will always sing the praises of the magic of dividends because they have changed my life. They have also changed my wife’s as well. You can get started with dividends with this article and book “How We Plan to Retire on Dividends (book).”
Being without money stress had allowed us to rekindle the pure love we had when we met in 2006. Back then, we had no kids, houses, career stress, etc. We were kids playing adult. Now we adults play like kids. We have the money to enjoy ourselves and each other. But we aren’t done yet. We continue on the grind to build up this income to the heavens.
Join us on our journey and as you continue yours. I just completed my most comprehensive book called “The Biggest Book on Passive Income Ever! (book)” The table of contents is 20 pages, and it is 1,250 pages long. It is everything I learned about a passive income on our journey to almost a $200,000 dividend portfolio. Plus three houses, a budding book career, and a military pension. Passive Income is our calling, how about you? Good luck!
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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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