Reuters Money

This piece by Nanette Byrnes originally appeared on Portfolioist.

With events in the Middle East and Africa boosting oil prices, some economic watchers are beginning to talk about the possibility of stagflation: a period in which both inflation and unemployment are high. Like the 1970s in the U.S., the time of “malaise,” lines at the gas pump, and strong performance of dividend stocks.

According to John Schloegel,  portfolio manager at Houston, Texas-based CORDA Investment Management, during the stagflation of the 1970s, 70 percent of the total stock market return for the decade came from dividends, only 30 percent from price appreciation. Even without that bad brew, dividends pack a punch, he says: Over the longer run 40 to 45 percent of total stock returns can be attributed to dividends.

Unlike bonds, which perform badly in times of inflation, companies stand a chance of beating inflation. If the core business thrives — and if the business is able to raise its prices faster than inflation — that dividend may even get a hike.

Is this stagflation?

In an interview with Bloomberg TV and an opinion piece in the Financial Times, PIMCO’s Mohamed El-Erian warned that a slower-growing West needs to be prepared for the impact of that region’s unsettled circumstances. “In the short run,” El-Erian wrote in the FT, “regional developments will be stagflationary for the global economy due to three main factors: First, higher oil prices will increase production costs and act as a tax on consumers. Second, greater precautionary stockpiling around the world will intensify pressures on commodities as a whole, aggravating the impact of demand-supply imbalances and large injections of liquidity. Third, the region will be a smaller market for other countries’ exports.”

The case for dividends

This chart from Simple Stock Investing shows the difference, adjusted for inflation, between what an S&P 500 investor would have earned over the past 60 years if they reinvested every dividend (the orange line) versus what price appreciation alone brought in:

That’s all the more remarkable because the dividend yield of the S&P 500 has been dropping over time, as more corporate managers put their extra money into stock buy backs and mergers and acquisitions. Overall, the companies of the S&P 500 are offering far less to dividend investors today than they once did. During the Depression-era early 1930s, dividend yields for those S&P 500 companies was over 12 percent. In 2010 their yield was below two percent.

Now dividend-focused investors may begin to get a break from the downward slide. Technology, long a hold-out against dividends, has seen some of its biggest players moving deeper into dividends including Intel, and Microsoft and maybe soon Cisco will join them. Tech companies have some time to go before they could reach the ranks of the Dividend Aristocrats, companies which have upped their dividends for 25 years or more. But CORDA’s Schloegel thinks more investors will be demanding dividends, especially if the market moves into a prolonged period of “a meandering market”, one that’s moving sideways. Companies will have to listen to what investors want, he argues.

Dividends are always going to be positive, so they will naturally play a bigger part in bear markets than they would in bullish times when stock appreciation is carrying the day. They are also more stable. According to a 2008 study by Standard & Poor’s: “over the time period 1989 to September 2008, the standard deviation of annual price returns (in its BMI World Index) is 13.96 percent. In contrast, the annualized standard deviation of dividend return is 0.27 percent over the same investment horizon.”

Stock prices move sharply up and down, but dividends bump along, whether it’s a time of inflation, stagflation or deflation.