Inflation is affecting all aspects of your life. First, your weekly trip to the grocery store is more expensive because the price of meats, dairy, fruits, and almost everything else costs more. Next, the gas you use in your car is way up in price from last year. In addition, rents are rising too. So inflation is probably impacting stocks in your portfolio too. However, some companies can raise prices and maintain margins and profitability in a high inflation environment. In this article, we talk about four dividend stocks to fight inflation.
Officially, the inflation rate was 8.5% in the twelve months through March 2022. Consumers need to go back to the early 1980s to experience even higher inflation. Many companies are facing unrelenting pressure with higher input costs. For instance, labor is more expensive since the unemployment rate is very low at 3.6%. Additionally, costs for freight, energy, materials, and more are all up.
Companies with pricing power are doing well, though. They are successfully able to raise prices without losing customers and sales. Often these companies provide essentials and necessities. For example, the best performing sectors year-to-date (YTD) are Energy, Consumer Defensive, and Utilities. Consumers and businesses often have little choice in paying for oil and gasoline, food and beverages, or power and natural gas. As a result, companies in these sectors can offset higher input prices by increasing the prices of their own products or services.
We discuss four stocks that are seemingly benefitting from the inflationary environment and will apparently have a good year in 2022.
4 Dividend Stocks to Fight Inflation
ExxonMobil (XOM) is one of the world’s largest oil and gas exploration and production companies in the world. The energy giant was founded in 1870. It operates globally through three operational segments: Upstream, Downstream, and Chemical.
In 2021, ExxonMobil produced approximately 2.3 million barrels of oil and 8.5 billion cubic feet of natural gas per day. In addition, total reserves were 18.5 billion barrels of oil equivalent (bpoe) at the end of 2021. In addition, the company has about 4.6 million barrels per day refining capacity.
ExxonMobil struggled through the pandemic. The COVID-19 pandemic significantly reduced demand for oil and gasoline as travel subsided. In response, oil prices plummeted. However, market demand recovered two years later, and oil prices surged. Additionally, the conflict in Ukraine has caused oil prices to rise further to $100+ per barrel. Similarly, gasoline prices in the U.S. have spiked, and the average gas price is now more than $4 per gallon.
Higher oil, gasoline, and natural gas prices during a period of inflation will be a windfall for ExxonMobil. Oil and gas majors are reporting good first-quarter results, and, likely, ExxonMobil will probably be no exception. The company guided higher in early April. Investor optimism is driving the stock price higher. The current stock price of $84.64 as of this writing is higher than right before the pandemic.
The annual dividend rate is $3.52 per share, giving an excellent forward dividend yield of 4.16%. In addition, ExxonMobil has increased the dividend annually for 40 years, making the stock a Dividend Aristocrat and Dividend Champion.
The payout ratio has improved over the past two years and is now about 65%. In addition, a relatively conservative balance sheet with low leverage and solid interest coverage supports dividend safety.
The stock is still a decent deal, too, with a forward price-to-earnings (P/E) ratio of about 9.0X.
- Ticker: XOM
- Market Cap: $347.73 billion
- Annual Dividend Rate (FWD): $3.52
- Dividend Yield (FWD): 4.16%
Coca-Cola (K.O.) is a stock that needs no introduction to investors. Coca-Cola was founded in 1886 and has grown into the largest non-alcoholic beverage company globally. The company has a well-recognized brand ranked No. 6 globally by Interbrand. Total revenue was $40+ billion in the past 12 months, outpacing its competitors.
The company owns many leading brands, and some have $1+ billion in annual sales. The primary brands are Coca-Cola, Diet Coke, Powerade, Sprite, Schweppes, Dasani, BodyArmor, Gold Peak, Thums Up, Fanta, Fresca, etc.
Although pervasive inflation for labor, freight, and inputs makes Coke's products more expensive, the company has successfully raised prices. The first quarter of 2022 saw stellar organic sales growth of 18% despite headwinds from COVID restrictions in China and the conflict in Ukraine. As a result, the beverage giant maintained its revenue and earnings per share growth outlook in the high single digits.
Coca-Cola is known for its dividend. The company is one of the longest dividend paying companies, with a 102-year streak. It is also an excellent dividend growth stock and one of the 39 Dividend Kings with a 60-year streak of annual increases.
The forward dividend rate is $1.76 per share, giving a dividend yield of about 2.7%. The payout ratio has been improving and is now 70%. In addition, Coca-Cola's high free cash flow provides additional dividend safety.
Coca-Cola's stock price is near its 52-week and an all-time high. However, the earnings multiple is ~26.6X within the range of the past 5-years.
- Ticker: KO
- Market Cap: $286.28 billion
- Annual Dividend Rate (FWD): $1.76
- Dividend Yield (FWD): 2.68%
The following stock that could benefit during a time of inflation is U.S. Bancorp (USB). The over 150-year-old bank operates mainly in the mid-West and West. It has an extensive network of about 2,230 retail branches and 4,000+ ATMs. The bank also operates online. Based on assets, U.S. Bancorp is the fifth largest retail bank in the U.S., with an asset base of more than $530 billion.
Banks often benefit during periods of inflation because the U.S. Federal Reserve usually raises interest rates. Hence, investment income on the asset base tends to rise over time. This fact occurs because when the Fed raises rate, banks usually increase loan and mortgage interest rates faster than deposit rates on savings accounts and certificates of deposit (CDs). In turn, this process causes the net interest margin (NIM) to increase and consequently causes the bank's net interest income (NII) to rise.
U.S. Bancorp reported a solid first quarter, beating estimates for revenue and earnings. Loan growth is driving NII higher. Furthermore, the NIM rose in sequential quarters. The firm is buying U.S. Treasuries and mortgage-backed securities (MBS). Yields of both are growing rapidly. For instance, the 5-year U.S. Treasury is now yielding 2.81% versus 1.37% at the start of the year.
The forward dividend rate is $1.84 for this Dividend Contender giving a dividend yield of 3.71%. The payout ratio is conservative at around 39%, meaning the dividend safety is excellent.
U.S. Bancorp’s stock price is down on the fear of lower demand for mortgages and other loans. However, the bank is trading at an earnings multiple of ~11.5X, below its 10-year average. Furthermore, according to Warren Buffett's 2021 annual letter, he is a big fan owning about 9.7% of the bank.
- Ticker: USB
- Market Cap: $75.55 billion
- Annual Dividend Rate (FWD): $1.84
- Dividend Yield (FWD): 3.71%
Lowe's (LOW), the home improvement company, is the last stock on our list. Lowe's was founded in 1921. Today, it is the second-largest home improvement and hardware retail chain in North America behind Home Depot (HD). The company operated 1,971 stores at the end of January 2022.
Lowe’s sells home improvement products, hardware, appliances, building and roofing materials, lumber, paint, lighting, plumbing items, etc., to consumers and contractors. Total revenue was about $96,250 million in the past twelve months giving the company roughly 10% of the $1 trillion home improvement and hardware market.
Lowe's reported excellent first-quarter results beating estimate. The company tends to grow during good times and bad. Renovations and new home sales drive growth. So even if inflation trends are higher, followed by interest and mortgage rates, homeowners will likely complete home projects.
Lowe's is known as a Dividend King with 60 years of increases. The company's dividend has a high growth rate of approximately 18.8% in the past decade and 17.32% in the trailing 5-years. Both rates are more than double inflation, meaning your passive income growth will beat it. The forward dividend rate is $3.20 per share, giving a dividend yield of 1.60%. The payout ratio is a conservative 25% leaving room for many more increases.
Lowe’s is trading at a reasonable price-to-earnings (P/E) ratio of ~14.8X, below its range in the past decade.
- Ticker: LOW
- Market Cap: $132.48 billion
- Annual Dividend Rate (FWD): $3.20
- Dividend Yield (FWD): 1.60%
Inflation can punish many companies, especially if they have no pricing power. However, some categories of companies have historically done well during times of inflation. Investors should consider these stocks for dividend growth or income portfolios. If you are trying to live off of dividends, your passive income stream must grow faster than inflation.
In addition to the companies mentioned above, others in the Energy, Consumer Defensive, and Financial Services sectors should do well during a period of higher inflation and rising interest rates.
Disclosure: Long KO
Author Bio: Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor and blogger on dividend growth stocks and financial independence. Some of his writings can be found on Seeking Alpha, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, FXMag, and leading financial blogs. He also works as a part-time freelance equity analyst with a leading newsletter on dividend stocks. He was recently in the top 100 and 1.0% (81st out of over 9,459) of financial bloggers as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.
Disclaimer: The author is not a licensed or registered investment adviser or broker/dealer. He is not providing you with individual investment advice. Please consult with a licensed investment professional before you invest your money.