Categories
Investing

Why Deflation is Good for Bond Investors

Deflation is good for lenders. Inflation is good for borrowers. Why? It all has to do with the future real value of money.

If a dollar in the future is worth more than a dollar today, it becomes increasingly expensive (in real terms) to service debt and increasingly beneficial to receive coupon payments. When dollars become more valuable, purchasing power rises. This means you can buy more stuff with the same amount of money. (In reality, most of the time future dollars are worth less than today’s dollars due to inflation.)

Here’s an example: if I’ve lent out $100,000 in exchange for $10,000 annual payment plus principal at maturity, I would prefer those future payments to have greater real value. While I will receive $10,000 in all situations, the value of that $10,000 is affected by prevailing price trends. A deflationary price environment erodes the prices of goods and services, thereby making future dollars more valuable, benefiting lenders.

The following chart illustrates this concept:

If deflation is good for lenders, why wouldn’t banks seek to create a deflationary environment by reducing money supply? While deflation might benefit a single lender, widespread deflation would actually hurt lenders due to greater loan defaults. A deflationary spiral lowers prices, causing companies to cut production and reduce wages. This reduces aggregate demand, further pushing down prices. Asset prices decline are liquidated to cover rising cost of real debt, with many organizations forced into bankruptcy as asset values fall below liabilities.

Beyond this, our entire credit based economy is predicated on growth, of which inflation is a component. A combination of real growth (productivity growth + population growth) and inflation is required to cover aggregate interest costs within an economy. Since real growth is hard to create, inflation is the grease that keeps the economic wheels turning.

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Categories
Income Investing Investing Wealth

New Year. Same Story.

December 31, 2020. We were all thankful that the worst year ever was finally over. Yet, so far 2021 is less than two weeks in and the drama is escalating.

I won’t get into the politics, because it’s the politics that is tearing us apart. Instead, I’ll focus on what we all agree on: this is some bullshit!

People are going broke, businesses are closing, folks are sick and dying. The population is at each others’ throats. Oh, and the climate is in slow collapse.

If there ever was a year to take personal responsibility, it’s 2021. Nobody is going to come fix your job, your marriage, your savings account. It’s up to each of us to make this a better world.

It wasn’t always this way. During the mid-20th century, most people could follow a predestined path that led to decent wealth and security. One didn’t really need to think or be different. You just needed to pick a direction and go. The baby boomer benefited from a post-war economic tide that lifted all boats. You had to f&ck up pretty bad to not do well as a boomer.

I don’t have to tell you those days are long gone.

Kids today enter the system saddled with debt because they were forced to get two masters degrees for an entry-level clerk job. Same job 50 years ago went to a high school grad. And that grad would then get married at 21, buy a house at 22 and support a nuclear family through to retirement on a single income and fat DB pension.

No more.

But you already knew this. You’ve seen the wealth disparity charts. Unless you’re one of the lucky ones, you’ve probably personally felt the pressures. I certainly have.

My story in 4 words: it’s all on me.

I have people depending on me to keep it together. Pay the bills, keep food on the table.

I have a successful career. But I fully realize it could end at any moment. I’ve seen dozens of my colleagues over the past 20 years hit a brick wall and never recover. This isn’t something people in their 20s know. Careers have an expiry date, and most end before planned retirement. This isn’t something most people decades ago had to consider.

If there’s one thing I want you to do this year, it’s this: consider what happens if your career ends next year, in 5 years, in 10 years. And when I say ‘end’ I mean END! Like your prospects are reduced down to shuffling coffees at the local diner.

How will you pay the rent and buy food?

With any luck, you have years to prepare. If you are young, you probably have many years of career growth ahead of you. But know this: 50 year old unemployed executives have few prospects. So prepare.

The simple answer many provide is to start a side hustle. Let me level with you. DumbWealth is my side hustle and I don’t make a dime. I do this as a labor of love and it’s still time-consuming and exhausting. I can’t imagine truly putting in an extra 4-5 hours a day after work (and life) to build a secondary source of income. I should, but who has the time or energy. Work, life, kids, exercise, chores. If you’re truly going to start a side hustle, one (or all) of these things inevitably gets neglected. You need a very understanding family and nearly infinite amounts of energy to build a viable side hustle.

OK, so why not take a hobby and try to make something of that?

Photography, painting, woodwork. Sounds great in theory, but turning a hobby into a business is a great way to kill that hobby. The business of photography is about 20% photography and 80% sales and marketing.

If you’re reading all this and saying “well, but…” then all the power to you. You might just be determined enough to pull it off. Some people are.

The rest of us need to build financial freedom in other ways. We need to save, invest and earn a little more at work. It’s a simple and powerful formula that most people neglect, either because it’s boring or they’re addicted to consumerism.

Cut your expenses, save as much as possible and invest that money in a portfolio that will eventually pay you for doing nothing. The income generated from an investment portfolio is probably the greatest gift we can give ourselves. It’s the one way to create a passive income without really doing much more than you’re already doing. You still work the same hours and have the same salary. You just need to sprinkle some planning and discipline onto your daily habits.

Start small, but start today. It’s a slow build that often leaves you questioning the plan. But keep at it and there should be a day when that investment portfolio earns enough to cover your basic needs if you were laid off. If all goes right, there might even be a day when that portfolio allows you to quit your job. That’s financial freedom.

Categories
ETFs and Funds

31 Dividend Payers that Raised in December

In my view, a dividend raise is a signal that management is confident in their business prospects – a larger dividend raise, even more so. The following is a list of large cap companies that raised their dividends in December:

(Note: Best viewed on desktop.)

CompanyAnnouncement DateAmountPrevious AmountIncrease AmountYieldEx-DatePayable Date
DRI
Darden Restaurants
12/18/2020$0.37$0.3023.33%1.25%2/1/2021
LW
Lamb Weston
12/17/2020$0.24$0.232.17%1.20%2/4/20213/5/2021
AMGN
Amgen
12/16/2020$1.76$1.6010.00%3.08%2/11/20213/8/2021
BEN
Franklin Resources
12/15/2020$0.28$0.273.70%4.55%12/30/20201/15/2021
LLY
Eli Lilly and
12/14/2020$0.85$0.7414.86%2.15%2/11/20213/10/2021
WLTW
Willis Towers Watson Public
12/14/2020$0.71$0.684.41%1.40%12/30/20201/15/2021
PFE
Pfizer
12/11/2020$0.39$0.382.63%3.74%1/28/20213/5/2021
CERN
Cerner
12/11/2020$0.22$0.1822.22%1.19%12/24/20201/12/2021
ABT
Abbott Laboratories
12/11/2020$0.45$0.3625.00%1.71%1/14/20212/16/2021
BMY
Bristol-Myers Squibb
12/10/2020$0.49$0.458.89%3.26%12/31/20202/1/2021
EIX
Edison International
12/10/2020$0.66$0.643.92%4.21%12/30/20201/31/2021
CNP
CenterPoint Energy
12/10/2020$0.16$0.156.67%2.94%2/17/20213/11/2021
CARR
Carrier Global
12/9/2020$0.12$0.0850.00%1.28%12/22/20202/10/2021
WPC
W. P. Carey
12/9/2020$1.05$1.040.19%6.03%12/30/20201/15/2021
CPB
Campbell Soup
12/9/2020$0.37$0.355.71%3.07%1/7/20212/1/2021
ZTS
Zoetis
12/9/2020$0.25$0.2025.00%0.63%1/19/20213/1/2021
FBHS
Fortune Brands Home & Security
12/8/2020$0.26$0.248.33%1.25%2/25/20213/17/2021
MA
Mastercard
12/8/2020$0.44$0.4010.00%0.52%1/7/20212/9/2021
ERIE
Erie Indemnity
12/8/2020$1.04$0.977.25%1.86%1/4/20211/20/2021
O
Realty Income
12/8/2020$0.23$0.230.21%4.70%12/31/20201/15/2021
TJX
The TJX Companies
12/8/2020$0.26$0.2313.04%1.59%2/10/20213/4/2021
MAA
Mid-America Apartment Communities
12/8/2020$1.03$1.002.50%3.31%1/14/20211/29/2021
ARE
Alexandria Real Estate Equities
12/8/2020$1.09$1.062.83%2.60%12/30/20201/15/2021
GGG
Graco
12/7/2020$0.19$0.187.14%1.10%1/15/20212/3/2021
RJF
Raymond James
12/7/2020$0.39$0.375.41%1.70%1/4/20211/19/2021
AES
The AES
12/7/2020$0.15$0.145.02%2.88%1/28/20212/12/2021
AMT
American Tower
12/3/2020$1.21$1.146.14%2.14%12/24/20202/2/2021
WEC
WEC Energy Group
12/3/2020$0.68$0.637.11%2.87%2/11/20213/1/2021
NUE
Nucor
12/3/2020$0.41$0.400.62%2.96%12/30/20202/11/2021
FMC
FMC
12/2/2020$0.48$0.449.09%1.62%12/30/20201/21/2021
SYK
Stryker
12/2/2020$0.63$0.589.57%1.08%12/30/20201/29/2021
Source: Market Beat. While efforts were made to ensure accuracy, we cannot guarantee data is correct.

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