Create a Safe and Anti-Inflation Portfolio with These 5 High Yield Dividend Stocks


Ready or not, here’s inflation. While it is not known whether the rapid rise in the prices of goods and services will be temporary or lasting, it is quite difficult to ignore how quickly certain items are increasing in cost.

According to the U.S. Bureau of Labor Statistics, 12-month unadjusted energy costs (ended September 30, 2021) increased nearly 25%, as used car and truck prices increased by more than 24%, based on changes in the consumer price index. for all urban consumers (CPI-U). Other key items, such as food and shelter, rose 4.6% and 3.2%, respectively.

The price increases we’ve seen in the CPI-U are about a 13-year high (5.4% for all items). In other words, if you have money in reserve, inflation quickly reduces your purchasing power.

Image source: Getty Images.

Perhaps the best way to fight rapidly rising inflation is to build a portfolio of safe, yet effective, high-yield dividend stocks that crush inflation. Companies that pay a dividend are often profitable on a recurring basis, and they have a proven track record of making their way through previous economic downturns.

The biggest dilemma for income investors is simply choosing which dividend-paying stocks to buy. This is because stocks with a high dividend (yield of 4% or more) carry additional risks. Since return is a function of payout versus stock price, a struggling company with a falling stock price might be nothing more than a return trap for investors.

But that’s not the case with the following five high-dividend stocks. These companies have an average return of almost 8.5% and can collectively help investors easily and safely exceed the prevailing rate of inflation.

Two businessmen shaking hands, one holding a miniature house in the left hand.

Image source: Getty Images.

Annaly Capital Management (10.13% yield) and AGNC Investment Corp. (yield 8.72%)

The first ultra-high income stocks that investors can confidently add to their portfolios to beat inflation are Annaly Capital management (NYSE: NLY) and AGNC Investment Corp. (NASDAQ: AGNC). I put these two companies together because they are both Mortgage Real Estate Investment Trusts (REITs) that operate in a very similar fashion.

Mortgage REITs like Annaly and AGNC pay great attention to interest rates. This is because they borrow money at lower short term rates and use that capital to acquire higher yielding long term assets, such as mortgage backed securities (MBS). The larger the spread between the average MBS yield minus the average borrowing rate – this spread is known as the net interest margin -, the more profitable these companies can be.

The interesting thing about Mortgage REITs is that they generally perform at their best during the early years of an economic recovery. Indeed, the steepening of the yield curve generally observed during a rebound after a recession helps to increase the net interest margin of Annaly and AGNC.

In addition, Annaly and AGNC almost exclusively buy agency securities. An agency asset is guaranteed by the federal government in the event of default. As you can imagine, this extra protection weighs on the returns these companies can expect to receive from the MBS they buy. However, it also allows them to use leverage to maximize their profit potential.

Historically, Annaly has averaged 10% returns over the past two decades, while AGNC has averaged double-digit returns for 11 of the past 12 years. Both are good bets to help income investors beat inflation.

A woman using the speakerphone function while talking outdoors on a smartphone.

Image source: Getty Images.

Mobile telesystems (10.83% efficiency)

It’s also easy to crush inflation when you own a stake in a company that analyzes a return of almost 11%! Russian telecom stocks Mobile telesystems (NYSE: MBT), better known as MTS, does not have a fixed dividend, but the company has averaged 10% for its annual return over the past six years.

The biggest catalyst over the next half decade for MTS is the steady deployment of 5G wireless infrastructure. It’s been about a decade since the last major upgrade to wireless download speeds, and Russian telecom operators have plenty of additional square kilometers to cover to reach national suburbs and rural communities. This ongoing 5G rollout is expected to encourage device upgrades and improve operating results for the company’s stable wireless segment.

Again, wireless growth tends to be modest at best. With wireless saturation rates already high in Russia, MTS has started to look to new verticals to drive growth.

For example, the company’s new revenue channels include MTS Bank, cloud services, and a pay TV segment. That non-core revenue increased 27% in the quarter ended June compared to the prior year period, with more people choosing more than one MTS service. In particular, cloud and digital solutions revenue grew 48% year-on-year, while the number of paid media subscribers increased by more than 100% to 3.2 million.

Once again, Mobile TeleSystems’ payment will change from year to year. But given the dynamics of its main and ancillary operations, a payout of around 10% may well be sustainable.

A small pyramid of tobacco cigarettes resting on a thin bed of cured tobacco.

Image source: Getty Images.

Philip Morris International (5.2% return)

The days of high-growth tobacco stocks are long gone. But even with the headwinds this industry has faced, giants like Philip Morris International (NYSE: PM) continue to deliver.

The first thing to understand about tobacco products is their pricing power. Even though adult smoking rates have declined in a number of developed markets as the dangers of long-term tobacco use have been revealed, Philip Morris hasn’t felt the twinge you’d expect. Indeed, a drop in cigarette shipments can be partially or totally offset by price increases. Philip Morris is the company behind premium Marlboro brand in markets outside of the United States, and it has had no problem driving higher prices on its main brand to increase sales.

Geographic diversity is another important selling point for Philip Morris International. As its full name suggests, it is present in more than 180 markets around the world. This means that it can compensate for tighter regulations in developed countries with strong potential for organic growth from the burgeoning middle classes in emerging markets.

And don’t overlook the company’s efforts beyond traditional tobacco products. Philip Morris’ IQOS heated tobacco system is developing like wildfire, although it is still in the early stages of global expansion. In the first nine months of 2021, nearly 70 billion units of heated tobacco were shipped, an increase of 28% from the period the previous year.

Philip Morris’ 5.2% return may be the bottom water point on this list, but it’s a rock solid gain.

Oil pipelines leading to numerous storage tanks.

Image source: Getty Images.

Enterprise Product Partners (7.42% return)

One final safe, high-yielding stock that can help investors crush inflation is the Master Limited Partnership. Enterprise Product Partners (NYSE: EPD). Enterprise Products pays a hearty 7.4% and overcomes a 22-year streak of increases in its annual base dividend.

In general, oil stocks are unlikely to rank too high among income investors following the historic decline in demand for crude oil suffered during the coronavirus pandemic. A number of upstream producers (ie drillers and explorers) have been hit by falling crude and natural gas prices.

However, Enterprise Products Partners is not a driller. It is a mid-size company that can store 14 billion cubic feet of natural gas, owns approximately 50,000 miles of pipelines, and also operates 19 natural gas processing facilities. While uncontrolled fluctuations in crude oil and natural gas prices can wreak havoc on upstream producers, the structure of Enterprise Products Partners’ transportation and storage contracts ensures stable cash flow.

Moreover, at no time during the pandemic has that company’s dividend been even remotely in danger of being cut. Its distribution coverage ratio, which describes the ratio of total operating cash flow to distributed cash flow, has never fallen below 1.6. Anything less than 1 would imply an unsustainable payout.

With crude oil and natural gas booming in 2021, Enterprise Products Partners’ dividend looks incredibly secure.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


Comments are closed.