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How to use dividends to beat inflation in 2022

by , 31 January 2022
How to use dividends to beat inflation in 2022
A couple weeks ago, it was revealed that SA's inflation hit the highest level since 2017.

The number came in at 5.9%, but the reality is, prices for some goods and services seem to have doubled over the past year.

In response to rising inflation, SARB increased the repo rate to 4%.

The average SA consumer may not care all that much about inflation as a topic, but they sure as hell care about seeing prices go up on everyday goods.

Likewise, steadily rising interest rates is something that you should stay aware of. Because no matter what people may or may not think about these forces, the reality is they impact us all.

The good news, though, is rising inflation and interest rates open the door for elite stock pickers.

But where exactly should one look?

Well, last week, I explained why commodities act as the best hedge against rising inflation. This week, I'm going to share another investment that typically boosts your overall portfolio performance when inflation is running rampant.


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The power of dividends…

As you know, there are two ways to make money in the stock market: capital appreciation and dividends.

Capital appreciation—an increase in a stock's price—gets most of the attention. Investors love to see their stocks soar 30%, 50%, 100%.

But largely ignored dividends can be surprisingly powerful!

Fidelity research revealed dividend payments have accounted for approximately 40% of the overall S&P return since 1930.

What's more, dividends can help prop up returns when stock prices struggle.

For example, stock prices in the S&P 500 fell during the crashes in 1930s and 2000s, but dividends almost completely offset the decline.

In the 1940s and 1970s, when inflation ran riot, dividends accounted for 65% and 71% of the S&P 500's return, respectively.

Denise Chisholm, director of quantitative market strategy for Fidelity, added that during periods of high inflation, stocks that increased their dividends the most, considerably outperformed the broad market, on average.

The consistent pay-outs helped reduce the volatility of a stock's total return.

And there’s the mere fact that dividend-paying stocks are profitable, cash-flush and demonstrate qualities that may bolster its stock during challenging times.

This is an especially big deal today, when the market has an unusually large proportion of unprofitable or marginally profitable companies.



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So where can you find the best dividend paying stocks…

When most people think dividends, they think of the big banks or miners — the household names that have become synonymous with income investing.

And yes, today, some SA mining companies sit on huge yields, generate tons of cash with very little debt.

But there are many smaller, overlooked and relatively safe stocks that can provide inflation-beating income.

Take Nu-World Holdings (JSE: NWL) for example…

It’s only a +R700 million company, yet they’ve been around 75 years!

Today, it sells these well-known brands in over 37 countries spanning four continents.  

In fact, Nu-World is…

  • One of the largest importers of consumer electronics in Southern Africa
  • South Africa’s leading importer and exporter of small electrical appliances
  • One of Southern Africa’s leading suppliers of “Branded Consumer Durables” to the retail market

But the real kicker is, Nu-World sits with nearly double the cash than debt.  In fact, the company holds nearly 70% of its market cap in CASH!

And just to top it off, its shares trade at a 50% discount to its real value. That’s
why Nu-World is one stock I’m backing to outperform in 2022.

These are the kind of opportunities you should look for in today’s market.

See you next week.

Josh Benton, Editor, Real Wealth

To discover my top 3 dividend stocks to buy in 2022, go here. For a limited time, you can receive this report absolutely free when you take a trial subscription of Real Wealth.

How to use dividends to beat inflation in 2022
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