Since inflation is often associated with strong economic growth, stocks in general tend to be well-positioned to withstand it over the long term. Today, wage inflation is a stubborn driver of inflation. This should give companies with pricing power—the ability to pass price increases along to consumers—a distinct advantage going forward.
In addition to pricing power, another competitive advantage is the ability to pay steady dividends. Dividends don’t just benefit shareholders, they’ve also historically added a substantial portion of return to the market as a whole.
For example, look at dividends’ contribution to market returns by decade (FIGURE 1). On average, dividends account for 40% of market returns since 1930. Two decades far exceeded that average: the 1940s and the 1970s. Rising inflation was in play during both.
- In the late 1940s, supply shortages combined with pent-up demand after World War II. While the S&P 500 Index produced a respectable return overall for the decade, a majority of the returns (67%) were generated by dividends.
- In the 1970s, surging oil prices caused the most infamous period of American inflation. The market notched another positive return, but this time, a whopping 73% of the S&P 500’s returns came from dividends.