This document discusses the importance of investing to maintain purchasing power in the face of inflation. It argues that many investors' goal should be to grow their capital at a rate that matches or exceeds inflation. Stocks that pay dividends are presented as a solution, as they can provide income that increases over time to outpace inflation. Several large, stable companies are used as examples that have consistently raised their dividends by over 10% annually for the past decade, demonstrating how purchasing power can be achieved through dividend-paying stocks.

1. I n v e s t o r s N e e d
P u r c h a s i n g P o w e r
1 9 6 0
4 ¢
2013
46¢

2. W W W. J A N N E Y. C O M
Mark Luschini, May 2013
There are a myriad of ways to determine the return needs of an
investor. A comprehensive financial plan is probably the best
approach for individuals and a consultative dialogue leading to
an investment policy is likely the best for institutions. In either
case, the key is to derive an investment goal that realistically
achieves long-term objectives.
While that goal is usually benchmarked to a stock or bond
index, most often in some combination, it may be better for
many to consider using purchasing power as an investment
objective. In other words, the goal should be to grow capital
at a pace that matches or exceeds the cost of living or
encumbered liabilities. That is not to disparage the utility of
capital market indices as a means to evaluate performance, but
rather to introduce a more fundamental hurdle most investors
need to consider when making investment choices.

3. 1W W W. J A N N E Y. C O M
Inflation Can Erode Purchasing Power
Inflation is a silent killer for investors who look to
their portfolio to generate cash flow in support
of meeting expenses. Recent reports of inflation
running near or below 2% on an annualized basis
belie what investors might actually experience as
costs for shelter, healthcare premiums, tuition, and
other items can rise at a much faster rate. Economic
conditions over the last several years being subpar
to historic trends has also contributed to tempering
inflation, but a longer term perspective (such as
that provided in Chart A) demonstrates that this
period is unusual and higher inflation should be
expected as the norm.
Looking at the long-term average of inflation
as being north of 3% gives an indication of the
hurdle an investor must achieve just to break
even. If the desire is to grow the portfolio so
that it covers the projected cost of inflation,
and generate a positive real return (excess
return after adjusting for inflation), then target
objectives of 4% or more are required.
In a portfolio construct that is expected to deliver
a return derived from the yield associated with the
instruments that populate the portfolio, like one
comprised of bonds, CDs or other conventional
fixed-income investments, the income provided—
while steady—may not change at all, or at least not
rapidly enough to adjust for more sudden changes
in prices. This is problematic even at today’s muted
level of inflation, let alone in an environment
where economic growth accelerates even a bit.
Since yields have been deliberately held at low
levels by the Federal Reserve, traditional sources
of income, such as government, corporate, and
municipal bonds, CDs, and money market funds,
have been repressed. Thus, investors are faced
with buying those fixed-income securities that in
some cases requires one to look to the right of the
decimal point to spot the yield.
That condition is unlikely to change anytime soon.
Even as the economy continues to show signs
of improvement, the Federal Reserve has been
clear in its intention to underwrite its reflation
for a sustained period. In other words, its policy
is to maintain very low interest rates until the
committee members of the Federal Reserve’s
voting body determine the economy to be strong
enough to withstand higher rates. While the
normalization of the Federal Reserve’s monetary
policy is inevitable, under the scenario articulated
by Chairman Ben Bernanke, it is not likely that
rates will be altered at all, let alone greatly, for
several more years.
Currently, the yield on the 10-year Treasury bond,
considered to be the bellwether against which other
bonds are priced, is approximately 1.7%. At the
moment, inflation as captured by the Bureau of
Labor Statistics in a report known as the consumer
price index (CPI measures the prices paid for a
representative basket of goods and services), is
running at 1.5% on a year-over-year basis. That
Chart A: Average Annual Inflation by Decade
(Source: Janney ISG)
12
10
8
6
4
2
0
–2
Percent
1913–1919 1920–1929 1930–1939 1940–1949 1950–1959 1960–1969 1970–1979 1980–1989 1990–1999 2000–2009 2010–2012
5.51
2.24
2.53
7.41
5.14
2.94
2.53 2.35
3.34
Long-Term
Average
1913–2012
–0.86 –1.92
10.10

4. W W W. J A N N E Y. C O M2
means the buyer of a 10-year Treasury bond today
will earn a real yield of just 0.2% (1.7% yield minus
the 1.5% CPI). Should inflation rise to historical
levels of 3% roundly speaking, the real yield on that
Treasury security would be –1.3%. Chart B provides
a picture of the yields for 10-year Treasury bonds,
which have fallen for over 30 years and which now
barely match—and sometimes don’t match at all—
the pace of inflation.
Chart B: Treasury and Real Yields
(Source: Janney ISG, Bloomberg, BLS)
© 2013, Janney Montgomery Scott LLC
0
Inflation: Tailwind for Bonds
Real Yields
The real yield is the yield in excess of inflation. When yields fall below the rate of inflation,
spending power is actually eroded, because the coupon payment does not keep up with the
increasing cost of goods.
10-Year Treasury Yield
CPI (Inflation YOY change)
1981 2002 2005 2008 20121990 1993 1996 19991984 1987
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0
(2.0)
Negative Real Yields
Need data
For many investors, then, the conundrum is not
just the search for a source of income, but rather
one that also has the potential to produce an
increasing stream of income. Purchasing power, or
the ability to derive through growth of capital that
is provided by a change in market value and/or
an attractive income stream that can grow to offset
rising costs, is the Holy Grail.
The Individual Investor
For many individuals, the loss of purchasing
power due to rising prices ravages their lifestyle.
A classic example is the price of the U.S. stamp.
A quarter-century ago, a typical letter could
be mailed for $0.22. Today, that same letter
requires a stamp priced at $0.46, a double since
1988. While perhaps trivial in absolute dollars,
the relative loss of spending power to someone
mailing an envelope to pay a bill is significant.
Maybe we could just chalk that jump in price to
mismanagement of the Postal Service and hold
that such a huge change is uncommon, but in
reality inflation over that same period is also up
roughly 100%!
Chart C: Inflation and Wage Growth
(Source: Janney ISG, BLS, BEA)
If someone is working, the offset to inflation may
be achieved through wage increases. However, as
shown in Chart C, there have been many periods
where inflation-adjusted wages (real wage growth)
have either fallen or were flat. Of course, if one
is not working but instead is retired, that ability is
lost completely, leaving only retirement benefits
and investments to compete with rising prices.
Therefore, the case for striving to maintain pur-
chasing power parity is relevant not just for retirees
seeking to augment retirement income from port-
folio distributions. Instead, it is broadly applicable
to even include those working but not currently in
need of income from their portfolios. The capital
growth that can compound as income is reinvested,
and possibly augmented by a rising stream of income
to further magnify the process, is a powerful elixir.
The Institutional Investor
Institutional investors often have to fulfill
spending policies or match liabilities in the
form of payments to plan participants, and they
similarly need to grow a portfolio to combat the
year-over-year increase in prices or cost-of-living
adjustments. It is no secret that the 5% spending
policy historically employed by endowments and
foundations was developed because a balanced
portfolio could be expected to achieve a return
that exceeds it by several percentage points. That
allowed the distribution to consume only a portion
of the total return, leaving some 3% or so expected
in the portfolio’s growth to account for inflation.

5. 3W W W. J A N N E Y. C O M
Institutions also face the prospect of matching the
distribution needs over a time horizon measured
in perpetuity, or meeting the obligations of payouts
to retirees that are living longer than ever. This
places a burden on the portfolio architecture
to produce attractive returns in a 2% inflation
environment like today, while anticipating the asset
composition needed to deliver good results in a
climate of 3–3.5% inflation—the historical annual
rate. Adding to that challenge is the same feature
of today’s landscape that individual investors face—
low bond yields. The 8% return assumptions that a
capital markets chart book can illustrate have been
generated over nearly a century of returns. The
issue, however, is that the “40%” component of the
well-known formula of 60% stocks and 40% bonds
for a “balanced” portfolio, had yields contributing
to that return that have historically averaged at a
much higher level than that which exists today.
Therefore, that same 8% outcome is more likely to
be achieved only by raising one’s expectation for
returns from the stock portion of the portfolio (say
from 10% annually to 12% assuming a 2% return
from bonds), or by raising the stock allocation to
80% from 60% and assume a trend return. The
additional stress placed on the portfolio from
assuming a higher-risk profile may generate a level
of volatility, or periods of performance negatively
disparate from benchmarks, that may challenge the
institution’s practice of policy fidelity.
The Purchasing Power Solution
Some investments have a strong reputation for
performing well in an inflationary scenario. The
classics include commodities, REITs, and stocks.
The issue for investors who consider income as
an objective is that commodities pay no dividends
(unless bought in the form of listed stocks) or
interest income. Publicly traded Real Estate
Investment Trusts, or REITs, are stocks and are
technically classified to be included in the financial
sector of a portfolio. These companies typically own
real estate in the form of commercial buildings,
health care facilities, or apartments to name a few,
and can increase rents to account for inflation.
Historically, companies have been able to absorb
inflating prices as they invest in productivity-
enhancing equipment and can pass through costs
to customers. While there is a limitation to how
high inflation can go before it becomes detrimental
to stock prices (historically above 4%), that does
not appear to be an imminent threat. Therefore,
we believe stocks offer a timely but lasting solution
to address the quest for purchasing power.
We posit that there are many attractive stocks to
own and hold that provide an appealing current
payout in the form of a dividend distribution,
and have demonstrated a history of raising their
dividend. It is that combination—high current
income that is better than alternative choices,
and the ability and track record to provide the
shareholder a raise that helps to increase cash flow
to match or exceed inflation—that ought to be
sought by investors. Is it a one-size-fits-all solution?
Of course not. Some investors may have the risk
budget to seek capital appreciation at the expense
of volatility and have no need for income; others
may own bonds as a component of a diversified
portfolio to stabilize returns and increase the
predictability of longer-term return projections.
And yet this “increasing dividend theme” should
have wide appeal, given the potential for capital
growth from the underlying business accompanied
by the rising stream of income that can be used as
cash flow to be spent or reinvested.
The S&P 500 index hosts a substantial number of
companies whose current dividend yield exceeds
that of the 10- and 30-year Treasury bonds (as of
5/1/13). As a rule of thumb, earning a yield from
a common stock (predicated upon its dividend
payout) that exceeds what one might earn in
the bond market is a soft hurdle to clear. While
Chart D: Asset Allocation Risk/Return Matrix
Asset
Allocation
Average Annual Returns Percent
Positive
Percent
Negative
Average
Gain
Average
Loss
Inflation
Hedge (1)
Inflation
Hedge
Standard
Deviation1 year 5 years 15 years 30 years
60% Stocks
40% Bonds
14.7% 5.6% 6.3% 10.8% 75.9% 24.1% 15.3% -7.9% 84.3% 84.3% 13.4%
(Source: Janney ISG, Barclays, S&P)

6. W W W. J A N N E Y. C O M4
we encourage that consideration be given to
companies that may not be included in the index
maintained by Standard & Poor’s, the fact that
there are 287 of the 500 with yields in excess of the
10-year Treasury bond demonstrates that the pool
of candidates is substantial (Chart E).
appealing. But even with the higher yield, that
says nothing about the prospect for appreciation
if these businesses grow, or about the richer
payout that might be fielded in time. The
purchasing power may exist in the current payout
alone, but the real kicker is in the form of the
latter two that offer the potential boost to defend
purchasing power. Consider that these four stocks
have had their dividends increase by an average
of 14% year-to-year over the last decade!
Perhaps another way to articulate the purchasing
power of a portfolio of dividend-paying stocks is
to look at the potential for payout growth. For
example, if an investor bought $1,000 worth
of shares in each of Microsoft, ADP, J&J, and
ExxonMobil in the beginning of 2003, the dividend
yield of that four-stock portfolio would have been
1.7%. The dividend payout of that $4,000 portfolio
would have been approximately $67. Fast forward,
and that same investor who held onto those shares
bought originally in 2003, would have received
around $180 in dividends in 2012. That represents
a 4.5% yield on the initial investment. And not
only did the portfolio grow in value from $4,000
to $5,700 (price only) by the end of 2012, but the
cumulative amount of regular cash dividends over
the course of the decade was $1,181. Long story
short, the 168% increase in dividend payout in
10 years is an example of the purchasing power
that can be achieved by owning instruments,
namely dividend-paying stocks, that can provide
shareholders a regular boost in income.
Granted, the risk associated with stocks, even AAA
ones, is greater than that of high-quality bonds or
cash equivalents. If, however, we are measuring the
time horizon to evaluate the likelihood of a better
outcome from this basket of income-producing
companies that have a precedent for raising their
dividends regularly in five to ten years or more, then
we would argue the odds tilt favorably toward stocks.
Chart F: Dividends Paid Per Share by Calendar Year
Company 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Microsoft (MSFT) 0.16 0.32 0.32 0.37 0.41 0.46 0.52 0.55 0.68 0.83
Automated Data Processing (ADP) 0.50 0.58 0.65 0.79 0.98 1.20 1.33 1.38 1.48 1.62
Johnson & Johnson (JNJ) 0.93 1.10 1.28 1.46 1.62 1.80 1.93 2.11 2.25 2.40
Exxon Mobil Corp (XOM) 0.98 1.06 1.14 1.28 1.37 1.55 1.66 1.74 1.85 2.18
(Source: Janney ISG, Bloomberg)
By way of an even more tangible example, consider
Chart F. There are four AAA-rated companies
in America, assigned as such by Standard &
Poor’s, the renowned credit rating agency. These
companies possess several common characteristics,
including a fortress balance sheet and a capital
structure that reinforces the quality of the
enterprise. Most, if not all, are household names,
but they also are dividend payers. Note in the table
the dividend payouts of each company over the last
10 years—several things stand out. The first is that
there has been no disruption to that payout, even
during 2008 when the financial crisis sent the world
into cardiac arrest and stock prices fell steeply.
Also, there was only one occasion where a dividend
wasn’t raised from one year to the next—and that
was Microsoft in the 2004–2005 time period.
An even commitment to each position today
would produce a yield of roughly 2.9%. Compare
that to a 10-year Treasury bond with a yield of
1.7%, and inflation of 1.5%, and that seems
Chart E: Individual Dividend Yields of S&P 500 Components (5-1-13)
(Source: Janney ISG)
6
8
10
12
Dividend Yield
0
2
4
D
Constituents of the S&P 500 ordered by Yield (lowest to highest)
1.63
287 of S&P 500 Stocks Yield More than 10-Year Treasury
127 of S&P 500 Stocks Yield More than 30-Year Treasury
2.83

7. 5W W W. J A N N E Y. C O M
Go Global
The exercise above was merely intended to bring
alive the “increasing income-paying stocks story”
in order to demonstrate the way by which one can
achieve—and what is meant by—“purchasing power.”
Investors do not need to limit their selection process
to just four companies. In fact, we believe strongly
in a globally diversified portfolio because the merits
of international investments demand it. Generally
speaking, incorporating non-U.S. stocks in a portfolio
may enhance results as global equity markets are
not perfectly correlated. This allows investors to spot
great companies; often times counterparts to a U.S.-
based firm that are in similar industries, where the
dividend or growth potential is more appealing.
In Chart G, we show the yields offered by the
stock markets of a sample of developed countries.
Obviously, the yields are mostly greater than
that of the U.S. stock market—the exception
being Japan—demonstrating that the search for
the solution to purchasing power should not be
confined to the selection of U.S. equities because it
may not fully exploit the outcome sought.
Concluding Thoughts
Purchasing power is simply the ability to maintain
capital growth that matches or exceeds that of
rising costs. That is a widely adaptable objective
for individuals and institutions alike. It applies to
investors in need of current income, and for those
that seek growth where income is considered a
contributing factor to total return.
Choices to satisfy the objective of purchasing
power parity mostly do not include government
and high quality non-government bonds and cash,
simply because the yields currently available on
these instruments are close to or are negative on
a real basis. Dividend-paying stocks, domestic and
foreign, offer the most attractive opportunity set
for building or completing a portfolio designed
for purchasing power. Further scrutiny should be
applied to tease out those companies with sturdy
cash flows to support the current dividend, as well
as those best poised to increase it.
Establishing a portfolio crafted to meet the
investor’s unique objectives is always paramount,
and is what drives the asset allocation decision. This
process should involve fashioning a solution that
maintains purchasing power today, as well as into
the future—a goal common to virtually all investors.
Chart G: Foreign Stock Yield
(Source: Janney ISG, Bloomberg)
5
4
3
2
1
0
Percent
United States Australia France UK Germany Switzerland Canada Japan
International investments currently hold particular
appeal because of valuation disparity when
compared with the U.S. There is also an academic
case whereby holding both U.S. and international
stocks in combination helps to optimize a portfolio
because of the different correlations between
countries, currencies, and risks associated with
various markets. The literature tends to be shaped
depending upon the time period in review, but
it consistently respects a notion that promotes
international diversity.

8. JANNEY MONTGOMERY SCOTT LLC
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© 2013, Janney Montgomery Scott LLC
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IMPORTANT DISCLOSURES
“Investors Need Purchasing Power” is being provided solely for informational and illustrative purposes, is not an offer to sell or a
solicitation of an offer to buy any securities that may be listed in this material, and does not constitute investment advice by Janney
Montgomery Scott LLC or its affiliates. Decisions to buy or sell a stock should be based on an investor’s investment objectives and
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financial instruments or strategies to particular clients. The information provided has been obtained or derived from sources believed
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accurate or complete. Any opinions or estimates contained in this report represent the judgment of the Investment Strategy Group of
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may sell to or buy from customers such securities on a principal basis.
Dividend information is as of May 1, 2013. “Dividend Yield” refers to the trailing 12 month dividend per share divided by share price.
Past performance is no guarantee of future performance and future returns are not guaranteed. There are risks associated with
investing in stocks such as a loss of original capital or a decrease in the value of your investment. A company may also decide to
decrease or cancel a dividend payment at any time without notice. For additional information or questions, please consult with your
Financial Advisor.