Yields on 10-year Treasury notes are hovering near 2 percent and the income from these investments is now below the rate of inflation.
According to the Bureau of Labor Statistics, the consumer price index rose 3.9 percent over the past 12 months.
Income from dividends on the Dow Jones Industrial Average is also lagging inflation but is higher than Treasury bonds. The yield on the index is at 2.7 percent and stocks offer a chance to beat inflation while bonds are guaranteed to lose money if inflation increases.
Companies that make up the stock index can raise prices, which should lead to increased earnings as inflation takes hold.
The Dow doubled in value as inflation ravaged bond prices in the late 1970s. In the 30 years since inflation peaked, bonds have outperformed stocks but that is because interest rates have fallen from double digits to 2 percent. If interest rates over the next 30 years, stocks should beat bonds.
Inflation has moved up and down throughout history and has been declining for decades. It is likely to increase from the current low levels. In this environment, stocks offer yield and some inflation protection. Within the Dow, 22 of the 30 individual stocks offer more income than Treasurys.
Stocks provide investors with a chance to preserve their capital in an inflationary environment. Bonds guarantee losses in buying power.
Every income investor should look at stocks now in order to preserve income in the years ahead.
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