One of the biggest challenges that retirees face is inflation
. Inflation decreases the purchasing power of the dollar every year. Over the past decade, inflation has averaged 2.40% per year, which has been slightly below the long-term average of 3% annually. Even if inflation were to continue to remain around 3% for the next few decades, this would affect the standard of living of retired investors over time. At a 3% annual inflation rate, the purchasing power of your income would be decreased by half in 24 years. As a result, investors relying on fixed income such as US Treasury bonds, would be faced with an income source which purchases less each year. In addition, given the low current yields
on US Treasuries, investors these days have few options to invest for income besides dividend stocks.
A portfolio of carefully selected dividend stocks could provide investors with regular recurring dividend payments which have the potential to grow over time. Many investors tend to forget that dividend stocks represent partial ownership of real businesses. As inflation increases prices for goods and services, companies with strong pricing power
tend to pass on price increases to consumers thus preserving and even increasing profits. Companies that tend to have strong pricing power, tend to have strong brand names
and quality products which consumers desire and are willing to pay a premium price for. Consumers who prefer the taste of Pepsi will pay for the brand name product rather than generic cola or Coca-Cola and vice versa for consumers who like Coca Cola products. For example, I was able to purchase a 24 oz bottle of Coca Cola in 2003 for $1 at Wal-Mart, whereas today I would have to pay at least $1.50 today.
Another important factor when selecting companies for one's income portfolio is whether the company has a history of consistent dividend increases that exceeds one decade