Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / How Inflation Is Quietly Reshaping Corporate Dividends
Transcript
- Lucas: So the core PCE number for April came in at 129.6, up a bit from March. That's the Fed's preferred inflation gauge, and it's still running above their target. But here's something I've been watching that doesn't get as much attention: how inflation is quietly rewriting corporate dividend policy. Luna: I feel like when people hear 'dividends,' they think stalwart safe income. But that's not the full picture right now, is it? Lucas: Not at all. The standard narrative is that dividend stocks are an inflation hedge. The logic is straightforward: companies with pricing power can pass along higher costs, maintain margins, and keep paying you. But in this cycle, the data tells a more nuanced story. Luna: What are you seeing in the numbers? Lucas: S&P 500 dividend growth in the first quarter of 2026 slowed to about four percent year-over-year. That's down from six percent in 2025. Meanwhile, capital expenditure across the index rose eight percent. Companies are choosing to spend on plants, equipment, and R&D rather than boosting payouts. Luna: Makes sense if they're worried about margin pressure. If inflation is persistent, you invest to protect your competitive position, not to reward shareholders today. Lucas: Exactly. And that's the shift. Look at Walmart. They raised their dividend by about nine percent this year, which is healthy. But they also announced a massive capital spending plan around automation and supply chain. They're doing both, but the emphasis has tilted toward reinvestment. Luna: And JPMorgan? I saw they hiked their dividend after the stress tests. But they're also buying back a ton of stock. Lucas: Right. JPMorgan increased its dividend by roughly ten percent in 2025, and they've got an active buyback program. But here's the thing: buybacks and dividends both return cash to shareholders, but they signal different things. A buyback is more flexible. If the economy slows, you can pause it without the market punishing you the way a dividend cut would. Luna: So in an uncertain inflation environment, management teams prefer the flexibility of buybacks over the commitment of a dividend hike? Lucas: That's part of it. But there's also a subset of companies that are actually increasing dividends faster than inflation. These tend to be in sectors like energy, materials, and some financials. The oil and gas majors, for instance, have been raising dividends at double-digit rates because their cash flows are tied to commodity prices, which have risen. Luna: But that also means they're more cyclical. If oil prices drop, those dividends could get cut. Lucas: Precisely. So the classic 'dividend aristocrat' approach — buying companies with long streaks of dividend increases — may not be the best inflation hedge this time. The aristocrats are often consumer staples, utilities, and healthcare. They do raise dividends consistently, but the raises are small, often below the actual inflation rate. Luna: Meaning your purchasing power from those dividends is still eroding, even if the nominal payout goes up? Lucas: Exactly. A two to three percent dividend increase when inflation is running around 2.6 percent core PCE, and headline CPI is even higher — that's a real raise of maybe zero, or negative. You're not actually preserving purchasing power. Luna: So what's the alternative? Some investors are looking at special dividends. Companies that have extra cash from a good quarter or asset sale pay a one-time dividend. It's not recurring, but it can be a meaningful chunk. Lucas: Yeah, and we've seen a pickup in special dividends this year. According to data from S&P Dow Jones Indices, the number of special dividend declarations in Q1 2026 was up about fifteen percent from last year. That's a signal that companies have cash but don't want to commit to a higher recurring payout. Luna: Makes sense in a world where the Fed is still at 3.63 percent and nobody's sure if the next move is a cut or a hike. Lucas: Right. The Fed's holding steady for now, but the uncertainty keeps management teams cautious. And that's actually a good segue to something we should mention. This show stays ad-free and independent because of listeners who chip in to support it. If you find these conversations useful, you can contribute at buy me a coffee dot com slash fexingo. It's what keeps us digging into the numbers rather than running ads. Luna: Yeah, and we really appreciate that. It keeps the focus on the data and the analysis, not on selling something. Lucas: So back to dividends. The other big trend is that technology companies — which traditionally didn't pay dividends — are now some of the largest dividend payers in the index. Apple, Microsoft, Alphabet — they all pay dividends now, though the yields are tiny. Apple's yield is around 0.5 percent. Luna: But they have enormous buybacks. Apple's buyback authorization last year was $110 billion. That's effectively returning capital, just not in dividend form. Lucas: Right, and that matters for the inflation-hedge question. Buybacks increase the value of your remaining shares, but they don't put cash in your pocket. If you're relying on your portfolio for income, buybacks don't help. You have to sell shares, which is a different strategy entirely. Luna: So for someone who's retired and needs income, dividends still matter. But they can't just buy the highest-yielding stocks and call it a day. They need to look at dividend growth relative to inflation. Lucas: Exactly. And that's where the concept of 'real dividend growth' comes in. You want companies whose dividends are growing faster than inflation, and you want that growth to be sustainable. That tends to favor companies with strong pricing power, low debt, and high returns on invested capital. Luna: Can you name a specific example that fits that profile right now? Lucas: One that comes to mind is a company like Visa. They don't pay a huge yield — around 0.7 percent — but they've been growing their dividend at about 15 to 20 percent annually for the last several years. Their business benefits from nominal GDP growth and inflation because transaction volumes rise with prices. And they have a wide moat. Luna: So it's a growth story, not an income story, but the dividend is a bonus that compounds nicely. Lucas: Exactly. And that's the mindset shift. In a moderate inflation environment like this one — core PCE at 2.6 percent, ten-year breakevens around 2.38 percent — you don't need to chase yield. You need to chase real total return. Dividends are part of that, but they can't be the only part. Luna: And if inflation were to spike again? Say, a supply shock or wage-price spiral? Lucas: Then the playbook changes again. In a high inflation scenario, you'd want companies that can pass through costs quickly, like energy or real estate. But those come with higher volatility. There's no free lunch. The key is to match your dividend strategy to your inflation outlook. Luna: So what's your takeaway for someone listening right now? How should they think about dividends in their portfolio? Lucas: I'd say don't treat dividends as a bond substitute. They're equity, with equity risk. Look at real dividend growth, not just yield. And consider that a growing dividend over time is more valuable than a high static yield, especially in an environment where inflation is sticky but not runaway. Luna: And don't ignore buybacks, but understand the difference. If you need cash flow, buybacks don't deliver it. Lucas: Right. The worst thing you can do is buy a stock solely for the dividend and then watch that dividend get cut because the business is struggling. Better to own a company that can grow its dividend through the cycle. Luna: So the headline: dividends still work as an inflation hedge, but only if you choose wisely and watch the real growth rate. Lucas: And that's the conversation we'll keep having. Thanks for listening.