Fight inflation by investing in it.
If you pay more for gasoline or diesel fuel, invest in energy stocks. Price hikes in retail stores intensify? Put money into businesses that sell the things you buy.
Let’s refine this idea a bit: focus on stocks that pay dividends, as their quarterly cash payouts will help you offset the rising cost of living. And in the dividend payout universe, focus on companies where we can expect a higher cash payout over the next 12 months. Financial strength is important, so favor companies with manageable debt and strong profitability.
All of these factors have been incorporated into a selection of stocks included in the S&P/TSX Composite Index by Morningstar CPMS. The result is a list of 17 dividend-paying companies in sectors such as energy, utilities, consumer goods, telecommunications and others where inflation is a problem for consumers.
Ian Tam, director of investment research at Morningstar Canada, included these rules in the screen:
- Dividend yields for each stock must be above the median level of its industry peers
- Return on equity, a measure of profitability and ability to pay dividends, must be above the industry median
- Cash flow-to-debt and debt-to-equity ratios should compare favorably to industry median levels
- Payout ratios, a measure of dividend sustainability, must be reasonable for the industry
- Expected cash dividend payouts for the next 12 months are expected to be higher than for the previous 12 months.
Four energy stocks make the list of 17 – you can skip them if you’re a socially responsible investor who avoids the sector, but there’s no better example of how to offset inflation in your investment portfolio. .
“Oil stocks are doing very well, especially for dividend growth,” Tam said.
The list of 17 also includes a selection of companies selling or manufacturing retail products and services: Sleep Country Canada Holdings Inc. (ZZZ), Gildan Activewear Inc. (GIL), Richelieu Hardware Ltd. (RCH) and Restaurant Brands International Inc. (QSR). The country’s major supermarket chains are conspicuously absent from the list, including Loblaw Cos. Ltd., Metro Inc. and Empire Co., owner of Sobeys.
Mr. Tam said these stalwarts of the consumer staples sector typically have dividend yields that are too low to meet the selection criteria. In a way, this speaks to their strength in recent years. Dividend yields and stock prices move in opposite directions. The only consumer staples company on the list is North West Co. Inc., which operates stores in Canada’s North and elsewhere.
The four financial services stocks on the list offer some of the strongest numbers for both dividend yield and estimated dividend growth this year. The Bank of Nova Scotia posted a dividend yield of 5.1% at the end of the week, while the dividend is expected to rise 8.4% from the previous 12 months. In comparison, the latest inflation rate is 6.8%.
Inflation is a toxic force in finance right now – it’s driving up the cost of living and a major cause of the turmoil we’ve seen recently in stock and bond markets. If you’re interested in stocks on this list, keep in mind how inflationary trends could play out for markets and the economy in the future.
Interest rate hikes used to control inflation could slow economic and corporate earnings growth, even to the point of triggering a recession. Consumer spending has so far weathered the surge in inflation, but that may be coming to an end.
The bottom line here is that the stocks on this list could easily go down, even if they produce dividends that help you cope with the rising cost of living. Think of these stocks as a short-term hedge against inflation and a long-term way to generate strong total returns based on dividends plus stock price gains.
The one thing that seems certain right now in finance: inflation isn’t done with us yet.
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