With rising prices virtually everywhere you look, I’d like to introduce my readers to a new word in the lexicon of economics. It helps describe what’s quietly going on throughout our country. The word is “shrinkflation” and it’s essentially self-explanatory.
In simple terms, it’s when the price of a product remains stable, but the amount of what you receive decreases. For example, I recently picked up what looked to be a half-gallon of ice cream, which, of course, is two quarts. When I got home and looked closer, my half-gallon was 1.5 quarts.
I also bought coffee in a package almost identical to the one at home. But it wasn’t 12 ounces. It was less. And I’m fairly certain my rolls of paper towels have fewer sheets than they used to have.
There are countless examples of shrinkflation up and down the aisles at grocery and retail stores everywhere. Most recently, when I was at the pharmacy, I noticed that many candy bars at the checkout appeared to be slightly smaller than before.
To help maintain the perception that prices aren’t increasing, manufacturers and distributors are keeping prices flat by delivering slightly smaller quantities. When you get less for the same money, that’s a price increase. In other words, that’s shrinkflation.
I may not be the best shopper, but I encourage everyone to be aware that this is going on. In many ways, you’re likely receiving a little less bang for your dollar.
Shrinkflation not only can hurt you as a consumer, but also as an investor. It’s no secret that many businesses struggled and some even closed their doors during the pandemic. As you’re aware, many publicly traded companies that issue stock reward their shareholders with cash dividends.
And not surprisingly, when businesses fall on difficult times, one of the first things they do is shrink or even eliminate the dividend. According to data from the well-respected investment firm, The Capitol Group, 242 companies eliminated or reduced their dividends during the past 18 months. That may not seem like a lot, but that’s almost the same number of companies that cut or eliminated dividends over the past 11 years.
With the economy beginning to re-open, the good news is that by the end of May, 76 companies had already reinstated their dividends. For investors, especially retirees who rely on their dividend checks, that’s especially good to hear.
I would caution that, if you’re seeking to supplement your income with stock dividends, please research the stock far beyond just the dividend. Some weak companies pay a large dividend to encourage investment. A large dividend with a falling share price is not a great strategy. Most seasoned investors prefer growing or stable companies with strong balance sheets and a reasonable dividend.
In other words, seek a strong company with a reliable dividend rather than a weak or shaky company with a large dividend.
That being said, it’s nice to see that many firms are gaining solid footing and once again comfortable with paying dividends. On the other hand, as consumer prices increase, be aware that many firms are trying to hide their rising prices with smaller quantities.
As the economy begins to gain traction, there’s a lot keep your eyes on, both as investors and consumers.
Securities offered through LPL Financial, Member FINRA/SIPC. E-mail your questions to kenmorris@lifetimeplanning.com. Ken is a Registered Representative of LPL Financial. Ken is Vice-President of the Society for Lifetime Planning. All opinions expressed are those of Ken Morris. LPL and Society for Lifetime Planning are independent companies. Investing involves risk including loss of principal. No strategy assures success or protects against loss.
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