Sticking to my plan has never been so hard! | Dividends vs Inflation

This time is really different! These are often considered the most dangerous words in investing.

But maybe this time it is really different?

Honestly, I have never invested in a market that was so difficult.

To clarify what I mean, let me share with you some facts that are currently impacting me very hard.

1. The Euro & USD / Polish Zloty exchange rate

As most of you know, I’m domiciled in Poland and we are not part of the Eurozone. This is unfortunate because Poland doesn’t have an attractive culture for dividend growth stocks.

Hence, I’m very dependent on the stock markets in the United States and in the Eurozone as part of my dividend growth investment strategy.

Just this year I am getting 5% less in Euros for the same amount of money invested.

EURPLN

5% difference doesn’t sound that much, right?

That’s true because if we compare this to the US Dollar then the difference is 25% compared to a year ago!

Luckily, I have always had a strategy to diversify my portfolio from a currency perspective. Hence, this exchange rate difference is “only” impacting 48% of my portfolio at this time of writing.

And yes, you could also argue that I’m getting 25% more in dividend income from USD-traded stocks right now.

That’s true, but unfortunately, I am still in the accumulation phase. Otherwise, this would’ve been a very pleasant experience.

So yeah, the weakening of the Polish Zloty compared to those 2 currencies is really hurting me.

2. Inflation

Do you remember those times during the covid lockdowns when we enjoyed all those extra savings?

Well, I have a feeling that we’re paying the price for that right now.

A lot of helicopter money was thrown at people to protect us from getting into trouble and at the same time we bailed out a lot of companies. This was money printing at its finest.

Many investors loved it and they used a lot of those savings to throw it at those hyper-growth stocks. Does anyone still remember the ARK Innovation ETF?

It’s quite an irony when you think that many of those stocks tanked by 70% since last year. Hence, most of those savings went up into thin air and I’m afraid that it burned many people’s hands.

Honestly, it would really be a pity to see the youth lose trust in the stock market and step out of one of the biggest opportunities in wealth creation.

But let’s get back to the topic of inflation.

I truly believe that all the money printing is a strong contributor to the inflation numbers that we are experiencing right now.

And boy, it looks bad in Poland right now:


source: tradingeconomics.com

So yeah, on top of the weakening Polish Zloty, it doesn’t help to have another 17.2% decline in buying power compared to a year ago.

I can tell you, my salary has not been able to keep up with that and I believe it’s unreasonable to assume that our employers will carry the entire difference for us in upcoming salary rounds.

So I definitely consider a part of my buying power to be “lost forever”.

3. Interest rates

I believe that many of you, especially the Dutchies, are enjoying very low-interest rates on your mortgages. The Netherlands is one of those countries where you can lock in your interest rate for the next 10, 20, or even 30 years.

This is so much different in emerging markets like Poland. The best I could get 6 years ago was a 5-year fixed interest rate but at a very expensive premium.

That’s why I ended up with a 3-month fixed rate like most Polish citizens.

Yes, you read that well, my interest rate gets adjusted every 3 months. There’s simply no offering for similar long-term fixed interest rates on mortgages.

Hence, this is also creating an issue for me, because it’s directly increasing the level of my expenses. And this in turn impacts my savings rate in a negative manner.

So what does it mean right now?

The 3M WIBOR (i.e. ECB 3 M interest rate) is currently at 7.33%. This means that my next 3 months’ term mortgage rate will be 9.2% (I was able to negotiate a 1.9% markup at the time of signing the contract with the bank).

3M WIBOR 1 Year History

Luckily, I have a relatively small mortgage compared to my salary, so I can still easily afford it.

At the same time, the government announced a “mortgage vacation” which allows homeowners to take a 2-month vacation break on their interest payments.

I signed up for this so that I could deploy this money into the stock market.

However, banks are not happy with that and neither am I because it breaks the rules of capitalism.

But if it was required to lessen the burdens to homeowners, then at least I’m glad they did it with banks. They are too big to fail, so pure capitalistic rules don’t apply to them anyway.

It’s also long overdue for bankers to pay their share for what happened in 2008 and 2009.

What to do with this?

This is the question that I’m pondering for quite some time already. We also get these kinds of questions a lot on the dividend talk podcast.

So what I’ll do now is to share my thoughts on where I stand currently, but this doesn’t mean that I won’t change my mind. I’m actually very much looking forward to some of your suggestions.

Pay down the mortgage?

Currently, I can get an immediate 9.2% return when paying down my mortgage. This sounds really great, right?

Actually, in the short-term definitely, but not in the long-term.

The reason is that I believe that I can make 8% to 10% in the next 30 years and I believe (or hope) that interest rates won’t be this high forever.

The 9.2% is not indefinitely, it’s really a return only at this moment in time. If mortgage interest rates would reverse to sub-5% next year or the year after, then that starts to become a mediocre long-term return.

At the same time, I don’t want my house to be entirely debt free.

As an example, I’m not 100% sure if we’ll ever see a Russian invasion over here. Hence, having most of my money in liquid assets is what I prefer. Brick & Mortar is not something I can carry with me when leaving the country in a rush.

Avoid buying US stocks for now?

As mentioned before, the US Dollar is historically very strong right now. So the immediate thought is to slow down my purchases in US-domiciled stocks or not buy them at all for now.

The issue with this thinking is that it’s based on price anchoring.

Most of us would probably be happy to buy US stocks again at a 1.2 currency exchange rate. This is where it traded for most of the last 2 years.

But as you can see in the chart below, there was also a time that it was trading around 1.40.

EUR USD currency exchange rate last 20 years

I still remember this and I had exactly the same thoughts when it dropped to 1.20 at the time.

Hence, I honestly don’t know at all where the US dollar will be trading in the next 2 or 5 years. Is this the new normal? Will the USD continue to strengthen?

If so, then it effectively would mean that I shouldn’t buy US stocks anymore in the next few years if I would only like to buy them around 1.20.

This is not realistic and that’s why I continue to tell myself that I should focus on Dollar Cost Averaging.

Over time, this should average my currency exchange rate so that if it is a blip, then it’s at least not that painful.

How to maintain my savings rate?

I honestly feel that there’s not really much that I can do here other than what I’m doing already: doing my best at work so that management is more likely to hike my salary.

In the end, it’s mostly about my savings rate during the accumulation phase of building out my portfolio.

At this moment in time, I really have no desire to adopt an even more frugal lifestyle.

For me, life is about creating great experiences and enjoying the time with people around me.

That’s why I continue to work on the income part of the savings rate formula.

Luckily I can also say that I truly like my job at this moment in time. Hence, it isn’t too difficult for me to have the motivation to do a great job at work.

Let’s see how our employers will reward us in the upcoming salary rounds 🤞

Dividends vs Inflation

Last but not least, a dividend portfolio seems to be one of the best inflation hedges out there!

I realize the below graph is a bit old already, but it nicely shows that dividends made up most of the return in the 70’s. This was a period with the highest inflation in a century.

If this history is a guidance, then the current inflation rates could be of temporary nature.

Source: themeasureofaplan

What I wanted to point out is that dividends contributed to 40% of the S&P500 return in the period of 1930 to 2021 and 54% during decades when inflation has been high.

When inflation has been high, the stocks that have increased their dividends the most have outperformed the overall market (source: Fidelity).

That’s even without reinvesting those dividends!

But of course, not every stock is the same in our portfolio and some of them will be more sensitive to inflation than others.

source: hartfordfunds

Looking at this chart, it’s clear that the Energy, Equity REITs, and Consumer Staples have historically a high probability of beating inflation compared to other sectors during periods of high inflation.

Based on that knowledge, I would say that my dividend portfolio is set up relatively well if history can be used for any guidance.

eDGI portfolio sector allocation October 2022

Conclusion

As I mentioned at the start of this blog post, investing has never been so hard for me.

Honestly, I feel like I’m in unchartered territory because I’ve never lived through a high-inflationary period in my adult life.

Having said that, I’m glad that I have this blog because it pushes me to do my due diligence and use an analytical approach to the situation.

It helps me to stay convinced that there is no better strategy that I can think of than to continue dollar-cost-averaging into my dividend-growth portfolio.

Who knows, maybe this will be the lost decade due to high inflation?

At least our dividend growth investment philosophy should make it less painful.

And on a positive note: lower stock prices mean higher dividend yields.

While it may not beat inflation in the short term, maybe it will allow us to reach our financial goals a bit quicker in the long term?

Of course, I might be wrong here and I might not have grasped some things that are important. In that case, please share your thoughts with us in the comment section below.

There is one thing I’m sure of: together we can beat this!

Yours Truly,

European Dividend Growth Investor

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European DGI

I am European DGI and it's my desire to retire early via Dividend Growth Investing as a passive income stream. This is not easy and especially when living in Europe. That's why I started this blog because I truly believe we can learn a lot from each other by sharing our journeys!

Disclaimer

I’m not a certified financial planner/advisor nor a certified financial analyst nor an economist nor a CPA nor an accountant nor a lawyer. I’m not a finance professional through formal education. I’m a person who believes and takes pride in a sense of freedom, satisfaction, fulfillment and empowerment that I get from being financially competent and being conscious managing my personal money. The contents on this blog are for informational and entertainment purposes only and does not constitute financial, accounting, or legal advice. I can’t promise that the information shared on my blog is appropriate for you or anyone else. By reading this blog, you agree to hold me harmless from any ramifications, financial or otherwise, that occur to you as a result of acting on information provided on this blog.

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