Everyone is talking about inflation these days.
And we’re not just talking about it, we’re experiencing it. Gas prices, food prices, housing prices – most prices, in fact – are rising, and some very quickly.
The latest inflation numbers show a 4.2% rise in consumer prices, the highest in 13 years. And with the population emerging from lockdown and the federal government spending like it’s Jeff Bezos going through a midlife crisis, there is a ton of cash sloshing around, chasing a limited supply of goods and services. That’s going to boost inflation even higher.
As an investor, you need assets that are going to keep up with – or preferably beat – inflation. One way to do that is with stocks that pay – and preferably raise – a dividend every year, ideally one that outpaces inflation. That way, you’re not only collecting cash but also increasing your buying power.
So while there could be more ado in the markets, there will be no further ado here. Let’s get right to my top dividend payers for beating inflation.
Rio Tinto (NYSE: RIO) is the second-largest metals producer in the world. Its bread and butter is iron ore – the stuff bridges, buildings and other massive infrastructure projects are made out of.
China is Rio’s largest customer, which bodes well for the company, as no slowdown is imminent there.
Rio Tinto’s dividend is variable – it goes up and down every six months. But considering that metals prices are going nuts and that iron ore is up 121% over the past year, I expect Rio’s dividend to increase over the next 12 months. Based on its dividend over the past 12 months, the stock yields 6.2%. But I think that is likely to go higher.
There are a lot of reasons to like NextEra Energy Partners (NYSE:NEP). For one, this stock is a pure play on renewable energy. Next Era Energy Partners has solar and wind projects around the country and is a cash flow-generating machine.
It currently yields 3.7%, but that yield is tax-deferred because it’s a return of capital.
Here’s how that works. Let’s say you buy a stock for $50 and the dividend is $1 per share and is return of capital. When you get paid that $1, you don’t pay taxes on it in the year it is received. Instead, it lowers your cost basis. So after one year, your new cost basis is $49, not $50. After five years, you’ve received $5 per share in dividends that you haven’t paid taxes on, and your cost basis is down to $45. If you sell the stock at $55, you’ll pay tax on a $10 capital gain because your cost basis was lowered to $45 from $50. The benefit is that you essentially collected the income tax that was deferred for those years.
The other reason I like Next Era Energy Partners is it is a Perpetual Dividend Raiser – a stock that raises its dividend every year. Except in Next Era Energy Partners’ case, it raises its dividend every quarter. In fact, it has raised its dividend every quarter since it began paying one in November 2014.
Over the past year, the dividend has risen by nearly 14% and management is committed to raising the dividend by 12% to 15% per year for the next several years.
That should more than keep up with even a bad bout of inflation.
This last one I’m going to bet you’ve never heard of. It’s a little-known ETF with a 3.5% yield.
It’s the Quadratic Interest Rate Volatility and Inflation Hedge ETF (NYSE: IVOL). We’ll just call it IVOL so I don’t have to say Quadratic Interest Rate Volatility and Inflation Hedge ETF over and over.
IVOL combines Treasury Inflation-Protected Securities, also known as TIPS, with options on fixed-income assets. So this ETF protects against both inflation and an increase in the volatility of bonds, which can occur during a big upswing in interest rates or a surprise interest rate cut.
So as inflation picks up, IVOL should generate greater profits. And if there is a sudden jump in interest rates, the options IVOL bought should provide further protection.
So there you have it, two stocks and an ETF that not only will help protect you from the ravages of inflation but also have solid yields and should thrive in a higher inflationary environment.
Good investing,
Marc Lichtenfeld
Chief Income Strategist, The Oxford Club
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