Dividend Sensei

Why Investors Don’t Need To Fear Inflation

Adam Galas

13 postsApril 9, 2021

Inflation and the soaring interest rates that go with it have been a growing concern for investors in 2021.

Six trillion dollars’ worth of stimulus has already passed. And there’s the potential for $4 to $5 trillion more on the way.

So it’s very understandable why 2021 inflation predictions from reputable economists go as high as 8%.

However, there are two big reasons why long-term investors need not worry about inflation.

Reason 1: Higher Inflation in 2021 Is Likely Transitory and Not a New Super-Cycle

Hyperinflation has been something that doomsday pundits have been predicting since the Fed began large-scale quantum easing, or QE, (i.e., bond-buying/money printing) during the Great Recession.

Back in 2012, one hyperbolic attention-seeker/gold-investing book promoter even ran a headline that read, “The data is clear, 100% inflation, and a 90% stock market crash in 2013.”

People were understandably nervous. And savvy salespeople knew exactly how to take advantage of that state of anxiety.

Hyperinflation, for the record, is defined by economists as 50% or higher monthly inflation. Unofficially, Venezuela is the current poster child for such things, with 438% inflation in 2021.

By those terms (the 50%, not the 438%), the U.S. has never experienced hyperinflation. Its highest rate ever recorded was 13.5% in 1979.

Moody’s – one of the 16 most-accurate economist teams on earth, according to MarketWatch – just updated its latest economic forecast. After crunching the numbers, Chief Economist Mark Zandi estimates that, to return to 1970s’ level inflation would require 8%+ annual wage growth for three consecutive years.

Yet, in March 2021, wage growth was 4.2% – basically in line with U.S. historical norms of 4%- 4.5%.

Note that the past decade has seen very disappointing wage growth of about half that. In other words, we’ve managed to get back to historical norms in this regard. And it would take wage growth doubling from here to bring back what we saw four decades ago.

Yeah, but…

That might be your automatic reaction considering how some Democrats in Congress are calling for $10 trillion in infrastructure spending in the next 10 or so years. In which case, what if the era of mega-spending and stimulus does cause inflation to go up intensely?

I consider that unlikely. But even if it did occur, prudent long-term investors wouldn’t lose much sleep, as I’ll go on to prove.

Reason 2: Stocks Are the Best Inflation Hedge in History

Since 1926, inflation has averaged 2.88% per year and dividends have grown about 4.9% annually. In other words, the stock market’s income power has outpaced inflation historically.

That’s because companies can pass on rising costs to customers and preserve profits, which get sent to investors in the form of dividends.

Certain sectors, such as real estate investment trusts (REITs) and utilities, even have contractual/regulatory rules in place ensuring they can automatically pass on most if not all inflationary price increases in the form of higher rents and utility rates.

Here are the inflation expectations from the bond market and economist surveys.:

3.1% inflation is expected in 2021, falling to 2.1% over the next five years.
The bond market expects 2.5% inflation for the next five years, falling to 2.1% over the next 30 years.
The Fed’s 2% symmetrical long-term core PCE inflation target means that, eventually, short-term interest rate hikes and an end to QE are likely. However, Moody’s doesn’t expect any significant changes to the Fed’s bond-buying program until mid-2022, with no interest rate hikes until 2023.

The bond market, meanwhile, does think that short-term rates might start rising as early as late 2022 – but only if the economy is roaring.

For context, the Fed’s long-term guidance for short-term interest rates is 2%-3%. And the bond market is currently pricing in 2% short-term interest rates by the end of 2024.

(Source: FactSet Terminal)

The FactSet economist consensus shows expectations of just 2.4% inflation in 2021 and 2.2% in 2022, with zero rate hikes over the next two years – the latter expectation being reiterated by the Fed’s most recent guidance.

But let’s say the experts are wrong. What if we pass several more big infrastructure bills, and inflation does go back to 1970s’ levels?

Here are some interesting facts about stocks, including REITs (the ultimate “bond alternative”), and how they did during the worst inflation in recorded U.S. history. Again, recall that 1979 saw 13.5% CPI inflation:

1974-1981 was the highest inflationary period in recorded history, with 9.3% average inflation.
1978 to 1980 was the worst inflation period of all, with 11.6% average annual inflation.
In 1981, interest rates peaked at 20% for the Fed Funds Rate and 16% for 10-year Treasury yields

Those are some terrifying numbers. So I understand why the mere thought of them might cause some investors angst, especially with such an overvalued stock market.

But guess how REITs performed during this period of sky-high inflation and interest rates?

In 1979, they delivered 24.3% total returns, or 10.9% after inflation.
From 1978 to 1980, they delivered 23.1% total returns per year, or 11.6% adjusted for inflation.
From 1974 to 1981, REITs delivered 16.3% annual total returns, or 7% after inflation.

Of course, REITs are a specialized kind of investment. Yet from 1974 to 1981, U.S. stocks in general delivered 10.1% annual total returns, or 0.8% adjusted for inflation.

Sure, the market’s real returns weren’t great. But they were still positive.

A 2019 Dutch study looked at global assets in both nominal and inflation-adjusted terms, all over the world, from 1960 to 2017. Naturally then, there were some high-inflation periods it covered.

It found that stocks in general and REITs in particular were still the best-performing inflation-adjusted asset class in history:

Global REIT inflation-adjusted total returns: 6.4% compound annual growth rate
Global stock real returns: 5.5% CAGR
Non-government bonds: 3.5% CAGR
Government bonds: 3.1% CAGR

That’s not to say you should go all-in to REITs if you’re worried about inflation. My point is simply that quality companies run by adaptable, skilled, and trustworthy management can still grow your dividends and make you rich.

Even if inflation does go back to double-digits.

Bottom Line: Whatever Inflation Rates May Be, Blue-Chip Stocks Remain Your Best Chance at a Rich Retirement

Peter Lynch is one of the greatest investors of all time, delivering 29% annual returns for 13 years at Fidelity’s Magellan Fund.

Lynch delivered those returns from 1977 to 1990, a period that included the highest inflation in U.S. history. While none of us may ever match his legendary performance, we can take his basic investment philosophy to heart.

That includes focusing on quality first, and sound valuation and prudent risk-management always.

No matter what the economy, interest rates, inflation, or the stock market is doing, quality blue-chip companies purchased at reasonable to attractive valuations within a prudently diversified and risk-managed portfolio will always be your best chance at achieving your long-term financial goals.

Happy Investing

Adam Galas

13 posts

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Adam Galas is a retired Army Medical Services Officer with an economics degree from the University of Minnesota who combines his 23 years of investing experience with a disciplined application of time-tested methods. Adam is holding or has held positions as a professional analyst at The Motley Fool, Seeking Alpha, and Simply Safe Dividends. His work has also appeared on thestreet.com, Forbes and Stocknews.com.

Due to his love of Buffett-style investing in safe, undervalued, dividend growth stocks, Tipranks recently ranked him Americas 43rd best analyst. And he is the second-most followed writer on Seeking Alpha, where as he is also a co-founder of Dividend Kings.

Thanks to a love of Buffett-style investing in safe, undervalued, dividend growth stocks, he was recently ranked the 43rd best analyst in the country by Tipranks and is the second-most followed writer on Seeking Alpha.

Same Scene, Different Perspective

REIT Mutual Fund	Symbol
Alpine Realty Income and Growth Fund	AIGYX, AIAGX
American Century Real Estate Fund	REAIX, REACX, AREEX, AREWX, ARYCX, AREDX
Real Estate Securities Fund	MRESX
AR Capital Real Estate Income Fund	ARIAX, ARICX, ARIPX
AssetMark Real Estate Securities Fund	AFREX
Aston/Harrison Street Real Estate Fund	AARIX, ARFCX
Baron Real Estate Fund	BREIX, BREFX
BlackRock Real Estate Securities	BIREX, BAREX, BCREX
Brookfield U.S. Listed Real Estate Fund	BRUAX, BRUCX, BRUIX, BRUYX
CGM Realty Fund	CGMRX
West Loop Realty Fund	REIIX, REIAX, REICX
Cohen & Steers Institutional Realty Shares	CSRIX
Cohen & Steers Realty Income Fund	CSEIX, CSDIX, CSBIX, CSCIX
Cohen & Steers Realty Shares	CSRSX
Columbia Real Estate Equity Fund	CREAX, CREIX, CRRVX, CRERX, CREEX, CRRFX, CREWX, CRECX, CREBX
Compass EMP REC Enhanced Volatility Weighted Fund	CWRAX, CWRIX, CWRTX, CWRCX
Davis Real Estate Fund	RPFRX, DREYX, DRECX, DREBX
Delaware Real Estate Investment Trust Portfolio II	DPRTX, DPRBX
Delaware Real Estate Investment Trust Portfolio	DPREX, DPRSX, DPRRX, DPRCX
DFA Real Estate Securities Portfolio	DFREX
Dunham Real Estate Stock Fund	DAREX, DNREX, DCREX
DWS RREEF Real Estate Securities Fund	RRRRX, RRREX, RRRAX, RRRSX, RRRBX, RRRCX
DWS RREEF Real Estate Securities Income Fund	REFAX, REFCX, REFIX, REFSX
Eaton Vance Real Estate Fund	EAREX, EIREX
EII Realty Securities Fund	EIIRX
Fidelity Advisor Real Estate Fund	FHEIX, FHEAX, FHETX, FHECX, FHEBX
Fidelity Advisor Real Estate Income Fund	FRIRX, FRIQX, FRINX, FRIOX
Fidelity Real Estate Income Fund	FRIFX
Fidelity Real Estate Investment Portfolio	FRESX
Fidelity Spartan Real Estate Index Fund	FSRNX, FRXIX, FSRVX
Fidelity Series Real Estate Equity Fund	FREDX, FREFX
Fidelity Series Real Estate Income Fund	FSREX, FSRWX
Forward Real Estate Long/Short Fund	KSRYX, FRLSX, FFSRX, KSRAX, KSRCX, KSRBX
Forward Real Estate Fund	FPREX, FFREX, KREAX, KRECX
Forward Select Income Fund	KIFYX, FSIMX, FFSLX, KIFAX, KIFBX, KIFCX
Franklin Real Estate Securities Fund	FREEX, FRLAX, FRRSX, FSERX
GMO Real Estate Fund	GMORX
Goldman Sachs Real Estate Securities Fund	GREIX, GRETX, GREAX, GRESX, GRERX, GREBX, GRECX
Great-West Real Estate Fund	MXREX
Heitman REIT Fund	OARTX, OBRTX
ING Real Estate Fund	CRARX, IREWX, IDROX, CLARX, CRWRX, CRCRX, CRBCX
INVESCO Real Estate Fund	REINX, IARFX, IARIX, IARYX, IARAX, IARRX, IARCX, AARBX
Ivy Real Estate Securities Fund	IRSAX, IREIX, IRSYX, IRSRX, IREEX, IRSCX, IRSBX
John Hancock Real Estate Securities Fund	JIREX
Johnson Realty Fund	JRLTX
J.P.Morgan Realty Income Fund	URTLX, JRIRX, URTAX, URTBX, URTCX
J.P. Morgan Security Capital U.S. Core Real Estate Securities Fund	CEEAX, CEERX, CEEFX, CEESX, CEECX
J.P. Morgan U.S. Real Estate Fund	SUSIX
Lazard U.S. Realty Equity Portfolio	LREIX, LREOX
Lazard U.S. Realty Income Portfolio	LRIIX, LRIOX
Manning & Napier Real Estate Series	MNRIX, MNREX
Morgan Stanley Institutional U.S. Real Estate Portfolio	MSUSX, MUSDX, MSULX, MURSX
Natixis AEW Real Estate Fund	NRFAX, NRFYX, NRFBX, NRFCX, NRFNX
Neuberger Berman Real Estate Fund	NBRIX, NBRFX, NREAX, NRERX, NRECX, NRREX
Nuveen Real Estate Securities Fund	FREAX, FARCX, FRSSX, FREBX, FRLCX, FREGX
Oppenheimer Real Estate Fund	OREAX, OREIX, OREYX, ORENX, OREBX, ORECX
PHOCAS Real Estate Fund	PHREX
PIMCO RealEstateRealReturn Strategy Fund	PRRSX, PETPX, PETAX, PETDX, PETCX, PETBX
Pioneer Real Estate Shares	PWREX, PYREX, PCREX, PBREX
Principal Real Estate Securities Fund	PIREX, PIRPX, PREPX, PRETX, PREJX, PRRAX, PRERX, PRENX, PRAEX, PRCEX, PRLEX
ProFunds Real Estate UltraSector ProFund	REPIX
Prudential Select Real Estate Fund	SREAX
Prudential U.S. Real Estate Fund	PJEAX, PJEZX, PJECX, PJEBX
REMS Real Estate Income 50/50 Portfolio	RREIX
REMS Real Estate Value-Opportunity Fund	HLRRX, HLPPX
Rydex Real Estate Fund	RYREX, RYHRX, RYCRX
SA Real Estate Securities Fund	SAREX
SEI Institutional Mgd Real Estate Fund	SETAX, SEIRX
Spirit of America Real Estate Income & Growth Fund	SOAAX
SSgA Clarion Real Estate Fund	SSREX
Stratton Real Estate Fund	STMDX
T.Rowe Price Real Estate Fund	TRREX, PAREX
TIAA-CREF Real Estate Securities Fund	TIREX, TRRPX, TRRSX, TCREX
Vanguard REIT Index Fund	VGSNX, VGRSX, VGSLX, VGSIX
Virtus Real Estate Securities Fund	PHRAX, PHRIX, PHRCX, PHRBX

REIT ETF	Symbol
Flex Shares	ASET
Wisdom Tree Global Ex-US	DRW
S&P 500 Equal Weight	EWRE
iShares FTSE Industrial/Office	FNIO
MSCI Real Estate Index	FREL
S&P REIT Index	FRI
First Trust S&P REIT	FRI
iShares Real Estate 50	FTY
Flexshares Global	GQRE
iShares Cohen & Streers	ICF
iShares International Developed RE	IFGL
iShares US RE	IYR
Premium Yield Equity REIT	KBWY
ETRACS Monthly Pay 2x Leverage	MORL
Market Vector Mortgage	MORT
iShares Global REIT	REET
iShares FTSE Mortgage	REM
iShares Residential	REZ
IQ US Real Estate Small Cap	ROOF
iShares FTSE NAREIT Retail	RTL
DOW Jones Global RE	RWO
SPDR Dow Jones	RWR
Schwab US REIT	SCHH
Super Dividend REIT	SRET
ProShares Ultra RE	URE
Vanguard REIT	VNQ
Vanguard Global ex-US	VNQI
iShares International Developed	WPS
Wilshire US REIT	WREI
Pacer Benchmark Data & Infrastructure RE	SRVR
Pacer Benchmark Industrial RE	INDS
Pacer Benchmark Retail RE	RTL
Hoya Capital Housing	HOMZ
NetLease Corporate RE	NETL

REIT Name	Ticker	Annual Increases/yr
Federal Realty	FRT	51
Universal Health Realty	UHT	33
National Retail Properties	NNN	29
Realty Income	O	27
Tanger Outlets	SKT	26
Urstadt Biddle	UBA	25
Essex Property Trust	ESS	25
W.P.Carey	WPC	22
National Health Investors	NHI	17
Equity Lifestyle	ELS	15
Digital Realty	DLR	15

Why Investors Don’t Need To Fear Inflation

Adam Galas

13 postsApril 9, 2021

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