Dividends Beat Inflation

Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Dividends are a proven way to beat volatility.  In up or down markets, dividends will consistently help you to grow your portfolio. Better yet, if you reinvest those dividends you're creating a formula for market-beating success.  

Dividends also protect you against inflation, which is a destroyer of wealth. Since the creation of the Federal Reserve in 1913 the dollar has devalued by 97%, when compared to commodities like gold. The moral of this story? Dividends protect your wealth.

Dirt low valuation

BP (NYSE: BP) trades with a 5.8 PE and a forward PE of 7.15.  And that is very low considering oil is back around $100.  If oil stays in the $90 - $100 range, BP should easily be able to hit its projected growth rate of 5%.

BP has a five year PE average of 8.7 and is trading at a discount due to uncertainty around its oil spill trial. If BP is found grossly negligent, it will have to pay $4,300 per barrel spilled as opposed to $1,100.  BP has already agreed to pay $4 billion in criminal penalties, but if it's found grossly negligent, that could sum could go up to $18 billion.

BP claims it has already paid out $24 billion, so maybe the court will be lenient, and yet, the inverse may also happen.  In either case, it might not matter as long as BP continues to pay out a 5.2% dividend.  And that should be fairly safe considering its payout ratio is 28.9%.  BP's stock may be cheap until the court officially rules, but at this price, BP looks like a great dividend play.

Love for the design

Apple (NASDAQ: AAPL) just started paying out a 2.9% dividend.  It now trades with a PE around 10, which is cheap considering its size, scope, and quality.  Apple is estimated to grow at a 10% pace and all it needs to do to hit that target is sign a rumored deal with China Mobile. If Apple were to make the deal then it would have access to a new, extremely large customer base, one that is willing to spend on various Apple devices.

Apple's payout ratio is 18.81%, which is very low.  In fact, it could easily raise its dividend as it has plenty of cash sitting on its balance sheet.  Ultimately, Apple should increase its dividend as it's struggling to find effective uses for its cash hoard.  Apple is a solid stock for a dividend portfolio as it offers the potential for strong dividend growth via a larger payout.

Telecom safety

Telecom companies generally pay out large dividends.  AT&T and Verizon (NYSE: VZ) are no exceptions. AT&T pays out 5% and Verizon pays out 4%, which is significantly higher than the average of the S&P 500. Why else should you look at telecoms?  Because revenue from customers with a data plan is generally sticky.  

In this U.S., 61% of those with mobile phones have smart phones (according to Nielsen), unlike South Korea and Japan, where full saturation is considered to be around 80%.  While cash from the data plans continues to roll in, both telecoms should be able to continue to raise their dividends. 

While both of these companies are safe bets, if Verizon can purchase the 45% it doesn't own from Vodafone, it will be able to drive its bottom line.  Therefore, of the two, Verizon may make for a better investment.

Final thoughts

A dividend portfolio is a great way to generate consistent returns in the market.  Apple and BP are two companies most likely to see strong stock and dividend appreciation.  Apple may decide to play nice with China Mobile and the BP trial is already underway.  In fact, most of the bad news may already be baked into the BP story.  

Verizon is especially attractive because of a potential deal with Vodafone.  Also its business continues to be extremely sticky.  Ultimately, as long as you have exposure to some dividend payers, you have a decent chance to beat inflation.

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Callum Turcan has no position in any stocks mentioned. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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