How Inflation Impacts Dividend Stocks and Muni Bonds

What’s likely to happen to interest-rate-sensitive investments like dividend-paying stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company. and state and municipal bondsA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. when inflation rises? Vice President Charlie Toole looked at the implications in our recent webinar,* Inflation, Inoculation and Infrastructure: Defining the New Normal.

Please enjoy the excerpt below and click here for the full webinar replay to hear more. 

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Charlie Toole:

One of the big fears with inflation is that when inflation is moving higher, that typically leads to rising bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. yieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price.. YieldsYield is a measure of the income on an investment in relation to the price. There are several ways to measure yield. The current yield of a security is the income over the past year (either dividends or coupon payments) divided by the current price. move in the opposite direction of prices, so when yields are rising, bond prices are falling, and when that happens, it’s not only bad for bond investors but it can also be bad for interest-rate-sensitive securities like dividend-paying stocks.

That’s one of the reasons  we prefer dividend-growth stocks. These companies tend to be higher quality and have stronger brands, so when inflation is rising, these stronger brand companies with loyal customers can raise their prices to offset the impacts of inflation; that can help protect their profit margins.

For municipal bonds, they’ve been one of the better-performing segments of the bond market this year. While the bond market is down about 2.5% as of last week, muni bonds were up more than 0.5%. There are other factors that influence the price of municipal bonds, like the financial strength of the municipality or the state issuing the bond. Then there’s tax rates; there’ve been a lot of headlines about tax rates going higher, so that makes municipal bonds more attractive to high-tax-rate investors, and the state finances have been improving.

The most recent COVID-19 relief bill had $350 billion allotted to states to help their finances. That relief, along with a reopening economy, is putting state finances on a positive track (or at least on a better trending track). That’s giving investors in municipal bonds more confidence that these municipalities will make good on their debt.

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Click here for a replay of Inflation, Inoculation and Infrastructure: Defining the New Normal. Please contact us at (800) 492-6868 to learn more about comprehensive wealth management solutions.