What’s risen faster than inflation? Dividends

Key takeaways

  • A one-two punch threatening income investors: rising inflation and low interest rates.
  • Dividends have historically grown faster than inflation and can help investors outpace inflation.
  • ETFs focused on dividend-growth stocks can help income-seeking investors diversify sources of income and seek long-term returns.

The first Big Mac cost 45 cents. Today the classic burger with special sauce costs nearly $6.1

The long-term effects of inflation erode how far you can stretch a dollar, and not just at the drive-thru. For income investors, fast-rising inflation tends to shrink the buying power of bond interest payments, an especially vexing challenge given that interest rates are currently near historic lows.

Bonds of course play an essential role for investors, but ETFs targeting stocks that are poised to grow their dividends can help diversify income and enhance returns over the long term.

Super size me

U.S. Big Mac prices

Super size me

Source: The Economist (as of Jan. 12, 2021).


Dividends outpace inflation

We get lots of questions from clients about how to reinvigorate income using high-dividend-paying stocks. Many don’t realize that when inflation is rising quickly, dividends have a key advantage compared with bond coupons: potential for growth. Over the past 150 years, dividends paid by U.S. companies have grown 3.7% per year compared with 2% per year for inflation.2

Doubling up

Annualized dividend growth of U.S. stocks vs. inflation, 1871–2021

Doubling up

Source: Source: Shiller Data Library, http://www.econ.yale.edu/~shiller/data.htm. Data covers the period January 1871 to March 2021. Dividend growth based on the S&P Composite. Inflation based on CPI.


Over four decades, shares of companies that initiate and grow dividends have outperformed shares of companies that kept dividends the same or paid no dividends. Importantly, dividend-growth stocks have been less sensitive to rising rates compared with bonds, a key consideration with U.S. policy interest rates near zero.3

The dividend-growth advantage

Dividend growers & initiators have led non-dividend payers and those with no change to dividends

The dividend-growth advantage

Source: BlackRock. Data from 1/1/1980 through 12/31/2020. The investment universe is the 500 largest U.S. stocks by market cap during each respective month. Dividend policy constituents are calculated on a rolling 12-month basis and are rebalanced monthly. Category cumulative total returns are calculated on a monthly basis and include dividends. Shown for illustrative purposes only and does not represent the performance of a specific investment product. Past performance is not indicative of future returns. The “Dividend growers & initiators” category represents performance for companies which either increased or initiated their dividend distribution. The “No change to dividends” category represents performance for companies which paid a dividend but have not increased nor decreased their dividend distribution. The “Non-dividend payers” category represents performance for companies which did not pay a dividend.


Secret ingredient: consistency

Companies with resources to grow dividends consistently tend to be profitable, financially sound and well-known. For example, Microsoft has grown its annual dividend for more than 10 consecutive years, with its latest payment representing 10% dividend growth year over year. Among international stocks, food and drink conglomerate Nestle has raised its dividend for 25 years in a row.4

The iShares Core Dividend Growth ETF (DGRO) and its counterpart, the iShares International Dividend Growth ETF (IGRO), seek to track indexes that include companies that have grown their dividends for five consecutive years or more, in addition to other criteria. Both ETFs track indexes that seek out companies that appear likely to continue growing dividends in the future, and both exclude non-dividend paying stocks.

Companies with lengthy dividend-growth records tend to be concentrated in mature industries, and increasingly include corners of information technology. In fact, tech-sector companies have been steadily increasing dividends for at least five years and recently made up 20% of DGRO’s holdings.5 As sectors such as tech continue to mature, dividend-growth strategies are increasingly diversified and contain stocks with both “growth” and “value” characteristics.6

Summing it up

The prospect of higher inflation at a time when interest rates are historically low make this a challenging market for income investors. iShares dividend-growth stock ETFs can help thread the needle between generating income and growth that can potentially outrun inflation.

Robert Hum, CAIA

Robert Hum, CAIA

U.S. Head of Factor ETFs

Daniel Prince

Daniel Prince, CFA

U.S Head of iShares Core ETFs