Dividends and the deflation nation

If you grew up in the 1970s, you generally expect prices to rise every week. You probably remember your parents complaining about the cost of living. You might even remember wage and price controls. The ’70s were annoying in so many ways.

RosieTheRiveter_RosieBut even now, six years after the bottom of the financial crisis, the economy’s main enemy is deflation, not inflation. And that requires Boomers who lived through hyperinflation to think more like their parents — the last generation to live through deflationary times.

First, a word about inflation. Yes, many things have risen in cost in the past six years, most notably college education and Daraprim, the drug produced by the company run by the vile Martin Shkreli.

But a wage-price spiral requires higher wages, and despite the current 5.1% unemployment rate, there doesn’t seem to be any improvement in wages. For most workers, the only real relief has come from lower gasoline prices, which have fallen to an average $2.31 cents a gallon from $3.25 a year ago. (Costco in Fairfaxx, Virginia, was selling unleaded for $3.02 yesterday.)

Oil prices aren’t the only things that have fallen. Unlike the 1970s, most commodity prices are tumbling. This is good for keeping prices low. The Consumer Price Index has risen just 0.2% the 12 months ended August. If you subtract out food and oil, however, the index is up 1.8%.

And, unfortunately, we’re importing deflation from abroad. As long as foreign workers can make things more cheaply than U.S. workers, U.S. companies are going to export manufacturing there, all other things being equal. (Apple now seems to be counting on China not only for manufacturing its products, but purchasing them as well.) It may be a long time before the world achieves some kind of rough parity in wages.

Finally, technology is a profoundly deflationary force. Those self-scanning stations at the grocery store used to be manned by people — as did gas pumps and bank teller windows, for that matter. Companies like Amazon and Uber, while convenient and disruptive, also keep wages low.

Those of us who watched constantly soaring prices in the 1970s — coffee and sugar come to mind — learned financial lessons that aren’t much good today. Back in the 1970s, it made sense to borrow lots of money. After all, when inflation is raging, you get to pay with increasingly devalued dollars.

The opposite is true in a deflationary period. If your wages fall, debt becomes progressively onerous. This accounts for, in large part, the Greatest Generation’s aversion to debt.

You probably know that too much debt is a bad thing. But for investors, a steady stream of income in a deflationary period is a wonderful thing, because a fixed payment will have increasing buying power. The Greatest Generation — those who could shake their distrust of banks — tended to be savers, because bank CDs offered a reasonable rate of return with no risk.

And this brings us to dividends, which not only offer a steady stream of income, but one that could potentially rise as well. In theory, dividends should be particularly valuable in a deflationary period. The most recent stock pullback was a good time to load up on large-company dividend-paying stocks with relatively low payout ratios. The payout ratio is the percent of revenue that goes towards paying dividends; the lower the better.

Clearly, stocks have risen again, but these days, there’s always another spate of volatility ahead. Here’s a list of 10 high-quality large-company dividend stocks with yields above 3% and very low payout ratios. Keep an eye on them in the next downturn.

Obviously, there’s more to a stock than a healthy dividend. But dividends always give you and edge — and it’s one that the Greatest Generation might have approved.

Company Ticker Price Dividend yield
Exxon Mobil XOM  $    79.26 3.65%
Johnson & Johnson JNJ  $    95.37 3.16%
IBM IBM  $  152.39 3.41%
Cisco CSCO  $    27.91 3.01%
QUALCOMM QCOM  $    57.78 3.33%
MetLife MET  $    48.39 3.09%
Exelon EXC  $    30.82 4.02%
Cummins CMI  $  113.09 3.41%
Principal Financial PFG  $    49.46 3.06%
Invesco IVZ  $    32.88 3.26%

Source: S&P Capital IQ. Data as of 10/9/2015

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