Greed is a Good Thing

By Chad Henage - June 25, 2012 | Tickers: MMM, CVX, GE, JPM | 0 Comments

• Email
• Print

A recent article in USA Today caught my eye. The title was, “Isn't investing in stocks just greed?” The question was asked of Matt Krantz, the financial markets reporter for the publication. To give credit, Matt did a fairly good job of explaining that investing is many times a “tug of war between greed and fear.” He made the “noble investors” argument, that long-term investors provide capital to businesses and entrepreneurs to make products and services that people want. Matt also acknowledged that when the market goes up, that sometimes people pile in trying to “get rich by investing in hot stocks.” What I was a little surprised to see is, he didn't address the main issue. Investing is necessary to keep up with inflation. This is a case where if you want to improve or even maintain your standard of living, greed is a good thing.

How can I say that greed is a good thing? It's simple really, greed is the desire to acquire or posses more than one really needs. Now I'm not suggesting that all investors should strive to gain more than they need, investing isn't really about getting more than you need. In truth, many investors are at risk of not being aggressive enough to even keep up with inflation. In common terms, inflation is the fact that over time the costs of goods and services goes up. Consider this, the average rate of inflation since the year 2000 has been 2.78%. This means investors needed to make at least 2.78% per year in order to simply maintain his/her purchasing power. To put some numbers to this, if you wanted to buy a car that cost $10,000 in 2000 that same vehicle today would cost nearly $14,000. Depending on your particular situation, your rate could be even higher. Individuals with high exposure to health care costs (think prescriptions) have seen a much higher rate of inflation. If you've had to deal with the costs of higher education, you know that the rate of increase has been far more than 2.78% per year. The point is, you can be too conservative, trying not to be “greedy” and get in a lot of financial trouble. So what should you do to keep up with inflation?

Most financial advisors would suggest trying to figure out a mix of investments that you can be comfortable with. While I personally believe everyone should be invested in some equities, that percentage will be different for everyone. Why do I think stocks deserve a place in every portfolio? Stocks are the only investment that I'm aware of that allow you to not only own a part of a (in theory) growing business, but that over time are expected to grow in both value and income production.

Consider a company like Chevron (NYSE: CVX). The company's stock has increased an average of 4.4% over the last five years just from capital gains. This means buying Chevron stock, you've already beaten inflation even if the company paid no dividends. That's hardly the end of the Chevron story. If you bought Chevron back in the beginning of 2007, your price would have been about $81.55. Your initial dividend yield would have been about 2.84%. Over the next five years, your effective yield would have climbed to over 4.4% today. Think about those numbers for a minute. Just from the increase in the stock price, you've already beaten inflation. From dividend income alone you would have beaten inflation again, and each year your dividend income has grown. This rate of return is good enough to keep you ahead of inflation, but doesn't seem “greedy” by any stretch of the imagination. If you want a few other ideas of stocks that should help you beat the inflation challenge, here are three others that look attractive at today's prices: 

General Electric's yield alone would be enough to offset the cost of inflation. With the company involved in everything from light bulbs, to jet engines, and financial services you get the benefit of diversification with one company. The company is expected to show better growth in the future as the economy continues to recover. 3M is a diversified conglomerate that has been paying increased dividends for over 50 years. While the company's current dividend yield would just barely keep up with inflation, the company's continued dividend raises should make sure that investors stay ahead of inflation longer-term. 3M's heritage is innovation and with expected growth of over 10% in EPS, the company is not resting on its laurels. While some might question my choice of JPMorgan Chase, the company's current issues are short-term in nature. In fact, these short-term issues give opportunistic investors a chance to pick up this well run bank with a yield higher than it would be if these issues never came to light.

The bottom line is investing in stocks isn't being greedy, it's a necessity if you are trying to keep up with inflation. Being too conservative will strip unaware investors of their ability to provide for themselves and those they care about in the future.

• Email
• Print
• Feedback