How should investors respond to rising inflation and interest rates?
Some commentators suggest that overweighting your portfolio toward high dividend paying shares is the way to go. On the face of it, this approach appears logical: even if inflation remains at or around 7% per annum, provided your portfolio is weighted toward shares that pay a dividend yield of around 7%, that dividend flow will act as a natural hedge against inflation.
However, there’s no strong evidence that high dividend paying stocks have delivered superior inflation-adjusted performance during periods of high inflation or rising interest rates.
Investors can put themselves in a better position to achieve their financial goals by staying disciplined, diversifying broadly, and considering strategies designed to outpace or hedge against inflation and rising rates.
Dimensional Fund Advisors, a fund manager whose funds are a feature of Highgate Partners model portfolios, recently analysed the performance of dividend paying shares vs non-dividend paying shares in times of high inflation. The study also looked at differences in the returns of high dividend paying shares and low dividend paying shares during high inflation periods.
In summary:
- there is no evidence that dividend-paying stocks deliver superior inflation-adjusted performance during high inflation periods;
- chasing dividends during, or in anticipation of, high inflation periods may be unlikely to lead to better investment outcomes;
- piling into dividend stocks would not have led to superior returns in months with rising interest rates;
- there is no discernable relationship between interest rate movements and the relative performance of dividend payers over nonpayers or high payers over low payers
It is natural to be concerned about the potential impact of high inflation and rising interest rates on portfolios. Nevertheless, the Dimensional Fund Advisors analysis shows there is no reason to expect dividend-paying stocks or high dividend payers to offer more protection and higher returns during these periods.
Market prices reflect the aggregate expectations of all market participants, including expectations about inflation and interest rates. Staying disciplined and broadly diversified, instead of chasing dividend stocks, may put investors in a better position to achieve their investment goals.
For more information, read the full article here:
Highgate Partners Limited believes the information in this publication is correct, and it has reasonable grounds for any opinion or recommendation found within this publication on the date of this publication. However, no liability is accepted for any loss or damage incurred by any person as a result of any error in any information, opinion or recommendation in this publication.
Nothing in this publication is, or should be taken as, an offer, invitation or recommendation to buy, sell or retain any investment in or make any deposit with any person.
The information contained in this publication is general in nature. It may not be relevant to individual circumstances. Before making any investment, insurance or other financial decisions, you should consult a professional financial adviser.
This publication is for the use of persons in New Zealand only.
Copyright in this publication is owned by Highgate Partners Limited. You must not reproduce or distribute content from this publication or any part of it without prior permission.
