October 3, 2022

Beating Inflation with Stock Dividends

Do we really need to stay ahead of inflation? What if we lose? Let’s find out what dividend stocks are all about.
Stock Dividend Investments = Value Investment?

As these questions may give rise to controversy, they should be discussed based on expert opinion.

An expert once wrote on the Efinancethai website that in making a value investment, we need to ask ourselves “what are we going to buy?” and “how much does it cost?” before we start digging deeper into the business analysis, annual reports, business tendency, current and future competitions, and that is qualitative analysis connected to the question “what are we going to buy?”.

Then we do quantitative analysis to determine the present value and future value from 3 financial data that are the financial statement, profit & loss, and cash flow statement in order to ascertain the features of what we are buying and “how much” the reasonable price for it is.

Once the two questions have been answered, take a moment to remind yourself of how hard you earned the money, then you will realize that you should have asked yourself “why would I buy it?”

Since the guru did not provide a clue to the answer, in my personal opinion, we may need to consider the stock price at the actual price on the screen and quantitively compare it with the present value to determine which one is cheaper.

Then we assess the target return by comparing the future or calculated value with the business forecast and feasibility to see the likelihood of the target becoming true.

In general, target returns cover stock growth margins and dividends (for dividend stocks).

Finally, after we know what to buy, how much, and what for, it becomes clear whether or not we should buy it.

Value Investment vs. Dividend Stock in Warren Buffett’s Way to Beat Inflation

Warren Buffet is globally recognized as the “Value Investment Godfather.” He cleverly thrives in the stock market by combining the GDP with the inflation rate before adding the return from a large dividend stock in America to ascertain the total ROI percentage.

In applying the concept to Thailand’s economy, we would combine the country’s latest inflation rate of 7.66% with the 2.2% growth rate plus the 2.6% average dividend of SET in 2021, then the formula would be 9.86% + 2.6% = 12.46% target return in 2022.

Nevertheless, it is subject to changes in inflation and GDP. Each investor exercises its discretion when it comes to which variables to consider.

Understanding Value Investment in the Historical Context of NER – North East Rubber PLC

Let’s use NER’s real-life scenario as a dividend stock case study based on Warren Buffet’s concept.

Say we buy NER’s stock on 19 April 2021 at the opening price of 5.30 baht when the inflation rate is still at 2.93%, GDP growth at 7.5%, and estimated dividend at 2.3% (2021) from the Food & Agriculture category.

It means that our investment aims for a total return of 12.73% based on the expected growth rate of 2.93% + 7.5% = 10.43%.

Plus the 2.3% dividend.

Comparing the target with the actual outcome.

If bought on 19 April 2021 at the opening price of 5.30 baht/share.  

And sold on 20 April 2022 at the opening price of 6.85 baht/share.

The margin of the stock price growth is 1.55 baht/share or 29% of the investment with 3 dividend payments (0.15 baht/share, 0.07 baht/share, and 0.36 baht/share respectively) totaling 0.58 baht/share or 10.94% of the investment.

Thus, by holding the stock for 1 year we gain 2.13 baht/share in total, or 40.18% of the investment.

That is a way to beat inflation and gain more than the expected target.

Do we need to keep beating inflation? What if we fail sometimes?

The inflation rate we hear about so much on the news actually comes from the Ministry of Finance by collecting the prices of 430 products and services in the market and comparing them with last year.

Energy products are the biggest variables in calculating the inflation rate and are responsible for 61.83% of inflation in July due to their increased prices.

Now, we understand why the inflation rate is as high as 7.66%. Because the oil prices today are almost double the prices in 2021.

The Bank of Thailand is intending to maintain the inflation rate as low as 1–3% to ensure economic growth and prevent hyperinflation that would reduce consumer buying power and sales revenue of businesses which would in turn force companies to downsize their operations and lay off employees.

On the other hand, when the inflation rate falls very low or below zero, deflation occurs usually following a decline in consumer buying power and leads to downsizing or shutting down of businesses.

We have covered inflation in the big picture. Now for common people, inflation simply reduces the value of money in your pocket so you have to pay extra for the same product you bought before. In other words, you need to tighten your belt.

After understanding inflation, we return to the question “Do we really need to keep beating inflation? What if we fail sometimes?” The answer may vary from person to person depending on how you look at it.

In my personal opinion, beating is a “nice to have” thing, not a “must have,” because the speculations are idealistic things that we use as indicators and guidelines.

It keeps us going and sets investment goals (dividend stocks, other securities, or businesses). Though we may lose some and win some, what really matters is we have done our best to make a living and enjoy life with our loved ones. At the end of the day, we realize that is all we need in this world.

Rich or poor, we all have the same needs. 🙂