(The views expressed here are those of the author, the publisher of Income Securities Advisor.)

NEW YORK - Income-oriented investors typically seek to maximize yield today, but if elevated inflation is here to stay, they may need to start thinking more about preserving purchasing power.

Investors seeking to generate significant income now and in the future, while managing risk, have long relied on instruments such as fixed-rate bonds and preferred stocks. However, with inflation now a major concern, some may start looking to other options, including dividend growth stocks.

Let's consider a scenario.

Suppose an investor on October 31, 2015 bought a corporate bond yielding 4.72%, the median at the time for bonds rated high-BB, just one step below investment grade, according to ICE Indices.

With the yield on the ultra-safe three-month Treasury bill then at a negligible 0.08%, this investor would probably have considered this purchase a reasonable risk-reward trade off.

Fast forward ten years. That investor was still receiving $47.20 a year on the $1,000 face value of their original investment on October 31, 2025.

But here's the problem. Due to inflation, those dollars now purchase 27% less than they did when the bond was purchased, and this problem will only get worse as time goes on.

Let's rewind and instead suppose that back in 2015 this investor bought 100 shares of the industrial and construction supplies manufacturer Fastenal at the then-prevailing price of $9.79 for a total investment of $979.00.

At the time, the company was paying a quarterly dividend of $0.07, adding up to annual dividends of $28.00 on the 100 shares, representing a 2.86% yield.

Back in 2015, that yield compared unfavorably with the one on offer from the high-BB bond, but, importantly, over the next ten years, while the bond income was being eaten away by inflation, Fastenal was increasing its dividend every year.

In fact, by October of this year, that dividend had more than tripled to $0.22 per quarter. The investor would now be receiving $88.00 per annum versus $47.20 on the bond. The yield-on-cost, based on the original outlay, would be 8.99%.

To get a comparable yield on a corporate bond today, one would need to descend to the lower reaches of speculative grade, commonly disparaged as "junk". The median yield for bonds rated mid-CCC at the end of October was 8.88%.

In short, this 'dividend growth' strategy entails a near-term sacrifice of income for the potential of capturing higher income down the road – something that may be particularly attractive to investors who have not yet retired.

DIVIDEND ARISTOCRATS

One may question whether Fastenal is an outlier and thus not truly emblematic of the power of dividend growth.

But take a look at the S&P 500 Dividend Aristocrats list, which consists of stocks that have raised their dividends in each of the past 25 years.

Three other "Dividend Aristocrats" also tripled their payouts over the past ten years. One, Lowe's, quadrupled its dividend over that span.

Moreover, the average "Aristocrat" doubled its dividend in the decade through October. Collectively, this group's dividends grew at a 7.55% compound annual rate, far outpacing inflation's 3.24% for the period.

To be sure, there is some variance within the group.

At the extreme low end, Emerson Electric qualified for inclusion in S&P's list by unfailingly upping its dividend annually over a quarter century. However, in the past ten years, its quarterly cash disbursements to shareholders rose by just 12%, from $0.47 to $0.5275.

DOING THE WORK

There are a few other caveats.

If your primary objectives are income and the growth of income – not capital appreciation – your portfolio's returns may lag behind those of broader stock indexes.

For example, measuring from October 2015 to October 2025, the Dividend Aristocrats Index delivered a 10.09% annualized total return, versus 14.60% for the S&P 500.

Once again, however, there was considerable variance within the group. The above-mentioned Fastenal stock's annualized total return was an index-beating 18.52%. That's certainly an example of having your cake and eating it, though one shouldn't consider that the norm.

Finally, while it's not unreasonable to expect many of today's good-quality companies to continue delivering steadily rising dividends, it's also true that results in the next ten years may not match those of the past ten years.

Interest rates and other market factors are different now from where they stood in 2015.

The key is to identify current "Dividend Aristocrats" that are likely to put together a similar record in the future, or to find good-quality companies that are apt to join their ranks.

No easy feat, but preserving one's purchasing power may be worth the effort.

(The views expressed here are those of Marty Fridson, the publisher of Income Securities Advisor. He is a past governor of the CFA Institute, consultant to the Federal Reserve Board of Governors, and Special Assistant to the Director for Deferred Compensation, Office of Management and the Budget, The City of New York.)

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(Writing by Marty Fridson; Editing by Anna Szymanski and Alexander Smith)