Dread it, run from it, destiny arrives all the same. Or should I say, inflation has. I’m paraphrasing Thanos here. And that might be appropriate, seeing as how high inflation is a villain fit for a movie. But fear not.
There are ways to position your portfolio and finances so that you have some protection from the ravages of inflation.
I’ve covered the broader finances in other videos. But this article will be delving into specific investment ideas.
Today, I want to tell you about five high-quality dividend growth stocks that are effectively fighting inflation. Ready? Let’s dig in.
High-quality dividend growth stocks are a good inflation hedge, in general. As prices rise, sales, profits, and dividends also tend to rise. Nominal growth is built right in. But some businesses could be especially effective at fighting inflation through the very nature of their business models. I’m going to be discussing five different businesses fighting inflation in five different ways.
The first dividend growth stock I want to highlight today is Duke Energy (DUK).
Duke Energy is an American electric power and natural gas holding company.
A utility? Fighting inflation? Yep. That’s right. See, utilities have a dual-edged sword with regulation. On one hand, they have a ceiling on how much they can charge. After all, we’re talking about local monopolies providing something people can’t live without. There has to be some reasonable safeguarding there. Otherwise, our electric bills would be outrageous. On the other hand, however, utilities are allowed to regularly present cases with their local regulators for rate increases.
Rates can be increased due to a variety of reasons, including rising input costs. Simply put, utilities are allowed to pass along a lot of their costs. And with everything going up right now, you already know that rates for utility companies like Duke Energy are also going up. It’s basically a lock. And that makes it almost a lock for this company to continue increasing its dividend.
Duke Energy has increased its dividend for 17 consecutive years.
Now, a utility isn’t something you buy to get rich. Instead, you’re looking for a steady-eddy dividend that is usually much larger than what the broader market offers, with some decent growth on top of that. Duke Energy’s 10-year DGR of 2.8% is somewhat disappointing, right?
Well, it’s important to consider that inflation over the last decade has also been very low. I suspect we’re going to see this number perk up. Meantime, the stock also yields 3.8%, which makes it a nice income play. And this big dividend is backed by a payout ratio of 72.7%, based on midpoint guidance for this year’s adjusted EPS.
This stock has worked well this year, but it could continue to work really well.
Duke Energy’s stock is flat on the year against the S&P 500’s 21% YTD slide. That’s a lot of relative outperformance. I think you see this because Duke Energy’s business model is seen as a safe haven. They’re providing a necessary service through local monopolies. And their rates are going to rise. It’s inevitable. With a yield near 4% and a dividend growth rate that could see nice acceleration, there’s a lot to like here. The one knock against the stock is, perhaps, the valuation.
Because of its drastic outperformance this year, the valuation isn’t super low. Based on that aforementioned guidance, the forward P/E ratio is 19.0. That’s a tad higher than I’d like to see for this name. Indeed, most basic valuation metrics are slightly elevated relative to their respective recent historical averages. But this stock is seeing a lot of demand from buyers. And rightfully so, in my opinion. Take a look at it.
The second dividend growth stock I want to highlight today is Enbridge (ENB).
Enbridge is a multinational energy distribution and transportation company.
Oil & gas has gone parabolic this year. And so anything with any exposure at all to energy prices is doing very well and fighting inflation very strongly. Are there any opportunities left in energy? Well, Enbridge might be one indirect long-term opportunity still there for the taking. Enbridge owns and operates crude and natural gas pipelines across the United States and Canada. It also operates a gas utility business. Additionally, the company has a renewable energy portfolio.
While this company doesn’t give you the direct upside exposure to oil prices, as its pipelines are akin to “toll roads” for moving energy, it’s still a major player in the North American energy complex with the corresponding exposure. This is the largest energy infrastructure company in North America. With counterparty risk reduced via better economics across the industry, I think Enbridge could be a great way to both fight inflation and get relatively cheap exposure to the energy space. And that comes along with a fantastic dividend that keeps heading higher.
Enbridge has increased its dividend for 26 consecutive years.
Want a reliable, rising dividend? Enbridge gives it to you in spades. This company has delivered the goods through thick and thin, even through multiple economic cycles that have sent commodity prices all over the place. So while they don’t have the direct upside exposure to oil prices, they also don’t hurt you via that direct downside exposure. The 10-year DGR is 10.5%, which is incredible when you consider that you’re also getting a yield of 6% here. And the payout ratio, at 64.3%, based on midpoint guidance for distributable cash flow per share for this year, indicates a safe dividend.
This stock has been on a tear this year. But it still doesn’t look all that expensive.
Enbridge was actually one of my top five dividend growth stock ideas for 2022. This stock is up 12% in a year in which the S&P 500 is currently in bear market territory. We’re talking more than 30 percentage points of relative outperformance, which is substantial. However, I think this is a case where Enbridge has simply moved from obscenely cheap to something more along the lines of reasonably valued.
Based on that aforementioned cash flow guidance, we’re looking at a forward multiple of 10.6. The stock’s five-year average P/CF ratio is 9.6. Nothing crazy here. Also, that 6% yield is only 30 basis points lower than its own five-year average. Is Enbridge cheap right now? I don’t think so. But I also don’t see it as egregiously valued at all. It still offers a 6% yield. And it’s arguably never been in a healthier spot in terms of industry dynamics. Don’t forget about this name.
The third dividend growth stock I want to highlight today is Lowe’s (LOW).
Lowe’s is a large home improvement retailer based in the United States.
Lowe’s is running a fantastic home improvement retail operation. But why is it on the list today? Well, Lowe’s offers the ability to fight inflation through a high growth rate. After all, inflation is a rate of change. A rate of growth. It measures the change in prices over a period of time.
If your expenses are rising by 8% YOY, well, you then want to make sure your income is rising by at least 8% YOY to keep pace. But what if your income can rise far higher than 8%? This is where Lowe’s comes in. Lowe’s caters to the American Dream of homeownership. And they do so within a powerful and profitable duopoly, which has helped to propel outstanding growth across the entire business, including the dividend.
Lowe’s has increased its dividend for 60 consecutive years.
If you think six straight decades of ever-higher dividends is impressive, wait until you see the growth. This company has a 10-year DGR of 18.8%. But wait. There’s more. The most recent dividend increase came in at over 30%. Did you catch that? Even after decades into dividend raises, they’ve been able to grow the dividend at a double-digit rate. And then, coming off of that already-high base, they’ve accelerated dividend growth further. It’s truly remarkable.
Even with inflation running in the high-single-digits, it’s not a big deal for shareholders of Lowe’s who are seeing their dividend income grow at a double-digit rate. Now, the stock does yield 2.3%. So this is more appropriate for investors who favor the growth and can let that compounding process play out. But with a low payout ratio of only 34%, even after all of that massive dividend growth, the dividend should continue rising at an inflation-beating rate.
This stock is up 550% over the last decade, even after a recent slide. I suspect there’s a lot more where that came from.
Yes, seeing annual inflation at 8%+ isn’t nice. But when your wealth and passive dividend income is compounding like this, it makes it far more acceptable. Even with inflation running hot, Lowe’s shareholders continue to see their purchasing power rise. What’s best of all about Lowe’s is that I actually think the valuation is rather appealing. It actually might be the most undervalued name on the whole list today.
We put out a full analysis and valuation video on Lowe’s in late May, showing why the business could be worth about $240/share. And that video was put together before Lowe’s increased its dividend by more than 30%, which only serves to make the stock that much more attractive and valuable. This might just be the name to be looking at right now.
The fourth dividend growth stock I want to highlight today is PepsiCo (PEP).
PepsiCo is a multinational food, snack, and beverage corporation.
Here we go. Yet another way to fight inflation. How does PepsiCo fight inflation? Through pricing power. They have incredible brands across their company, ranging from Doritos to Gatorade to their namesake Pepsi. This is a company that has more than 20 different billion-dollar brands. And because of the quality of those brands, the company is able to pass along rising input costs and raise prices on their products. And what does it mean when you have higher prices for the likes of Doritos, Gatorade, and Pepsi? Well, it means that PepsiCo’s revenue goes up. And so should the profit and dividend.
PepsiCo has increased its dividend for 50 consecutive years.
How do you pay out an ever-higher dividend to your shareholders for five straight decades? By running a world-class business that can deal with economic shocks. Remember, the annual inflation rate was running well into the double digits back in the late 70s, yet PepsiCo was still increasing its dividend. And I don’t see any reason why they won’t continue to do so now.
Their 10-year DGR of 7.7% pairs well with the stock’s current yield of 2.9%. And even with inflation currently running somewhere around 8%, PepsiCo’s dividend growth is at least keeping up with that. So that is defending your purchasing power. With the payout ratio sitting at 62.9%, which isn’t terribly high for the company, the dividend is in a good position to continue growing for years to come.
PepsiCo has the brands, market positioning, and pricing power to fight inflation.
We are talking about basic foodstuffs here. Could consumers resort to eating bread and tap water for sustenance? I guess. But I just don’t see that happening. In the real world, where reality exists, their products are such that there’s not much of a need for a trade down. Not much luxury is to be found in stuff like chips and flavored beverages.
PepsiCo isn’t selling caviar and champagne. Look, we all know that these products were much cheaper 10 years ago than they are today. And they’ll be more expensive 10 years from now. Shareholders in PepsiCo get to ride that inflationary wave higher through purchasing power, which should continue to translate into their dividend steadily growing like clockwork. I actually see this stock as fairly valued, with most basic valuation metrics in line with their respective recent historical averages.
That 2.9% yield, for instance, is right there with its own five-year average of 2.8%. And the P/CF ratio of 18.3 isn’t far away from its five-year average of 18.7. This is a world-class business with pricing power. If you’re looking to fight inflation, consider letting PepsiCo go to bat for you.
The fifth dividend growth stock I want to highlight today is W.P. Carey ( WPC).
W.P. Carey is a global net lease real estate investment trust.
W. P. Carey owns a large portfolio of real estate, mostly in the US and Europe, rented out to a variety of tenants. What’s great about this specific REIT, in terms of fighting inflation, is that its leases often have inflation clauses built right in. We’re talking about automatic, inflation-based rent escalators.
Bumps in rent are basically guaranteed here with inflation running hot. 58% of W.P. Carey’s leases are linked to inflation through CPI. 38% of those leases are uncapped CPI. So with inflation running at a high-single-digit YOY rate in the US, it’s a significant runway for higher rents across much of W.P. Carey’s property portfolio. That puts this REIT in a special spot to actually benefit from high inflation and continue increasing its revenue, cash flow, and dividend.
W.P. Carey has increased its dividend for 25 consecutive years.
The 10-year DGR is 7%, although more recent dividend raises have been very modest. But with inflation now taking off and the rent escalators acting as a tailwind that’ll work its way through the business and its results, I suspect the next few dividend raises could be quite nice. Meanwhile, the stock yields 5.3% right now, which is plenty of income in what is still a low-rate environment.
The payout ratio is 80.7%, based on midpoint guidance for this year’s adjusted funds from operations per share. That’s fairly common for this REIT, based on its history. But I think accelerating growth in the business can allow for the payout ratio to slightly compress, even while dividend growth simultaneously picks up.
This stock is flat on the year, even while the broader market has cratered. That relative outperformance could continue.
This stock has been a big winner in 2022. However, we are talking about a flat stock here. So it’s priced the same as it was at the beginning of the year, even though the dynamics, in terms of inflation, have become more advantageous for the business. Is the stock not a better deal in June 2022 than it was in January 2022… when it’s priced the same? I’d argue it is. Most basic valuation metrics are roughly in line with their respective recent historical averages.
Yet the business might be better positioned now than it’s been at any other point in the last five years. The P/CF ratio of 15.5 is slightly less than its own five-year average of 15.3. It’s definitely not the cheapest REIT out there, but it could be the best in this inflationary environment for long-term dividend growth investors. Take a good look at W.P. Carey.
— Jason Fieber
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Source: DividendsAndIncome.com