5 reliable dividend stocks to help you crush inflation

It’s official – inflation is back in town. Specifically, the Consumer Price Index (CPI) jumped to 4.2% in April after remaining below 3% since the second half of 2011.

There are many reasons to be concerned about inflation. This eats away at the value of your cash, increases your cost of living and puts pressure on the companies in your investment portfolio. But if inflation may seem like an all-powerful enemy, you can fight back. One strategy is to invest in premium dividend stocks.

Equity inflation hedging

Stocks are a good hedge against inflation because their growth rates exceed inflation over time. In the long run, stocks grow about 10% per year on average. Inflation, on the other hand, averages around 3%.

Image source: Getty Images.

Unfortunately, long-term stock price appreciation doesn’t help you deal with higher short-term living costs. Dividend stocks help solve this problem by paying a portion of your returns in cash.

Meet the dividend kings

Better yet, some dividend-paying stocks have a reputation for increasing their payouts to shareholders every year. It’s attractive in any economic environment, but a rising dividend is especially useful in times of inflation. If your paycheck or Social Security earnings aren’t keeping pace with rising prices, ever-larger dividend payments can help.

The most reliable dividend payers can be found at an exclusive club called Dividend Kings. To be a Dividend King, a company must have increased shareholder payouts for 50 years or more consecutively. It is an achievement available only to well established and mature organizations.

A long history of increasing dividends does not mean the trend will continue forever. But that does mean the management team is likely motivated to stick with a rising dividend for as long as possible. Even so, dividends require profits and cash. If these things dry up, the dividend will go up as well.

Reliable dividend stocks

The table below shows five Dividend Kings that have returns above 2% and payout ratios below 70%. The payout ratio is the percentage of a company’s profits that it pays out as dividends. It is an indication of the ability of the company to maintain its dividend. Lower is better – anything over 75% warrants further research.

Also below is the percentage increase in each company’s most recent dividend increase – all of which are greater than 3%.


Current dividend yield

Most recent percentage increase

The payout ratio

Procter & Gamble (NYSE: PG)




Clorox (NYSE: CLX)




Original parts company (NYSE: GPC)




Hormel Foods (NYSE: HRL)




Johnson & johnson (NYSE: JNJ)




Table data source: MarketBeat

More reliability metrics

Besides the payout ratio, other parameters that can indicate the reliability of dividends are the debt ratio, net profit margin and profit forecast.

  • Rate of endettement. The debt ratio is long-term debt divided by equity. It is a measure of leverage. Higher leverage is riskier because it means the company has a larger debt balance to repay. Debt repayments use cash, which limits the funds available to pay shareholders.

    A debt-to-equity ratio greater than 2 is high, although some mature companies operate with much more leverage. Home improvement retailer Lowe’s (NYSE: LOW), also Dividend King, has a debt ratio greater than 15.

  • The net profit margin. The net profit margin is the percentage of sales remaining after the expense has been paid. A higher margin indicates a more efficient operation. Operational efficiency adds a cushion when it comes to profit making.

    A double-digit margin is ideal, but it varies from industry to industry. Retailers, for example, have low margins. Walmart (NYSE: WMT) has a net profit margin of around 3%, but still generates a lot of cash to fund its dividend.

  • Revenue forecast. A history of profitability does not always translate into a future of profitability. Pay attention to analyst forecasts before and after investing in a Dividend King. You’ll want to know if the outlook is south. A negative earnings outlook could be bad news for the dividend.

Kings to crush inflation

You can fight inflation with reliable dividend paying stocks. And historically speaking, the Dividend Kings are among the most reliable dividend payers. But do your research. If inflation sets in for a while, that’s a factor all of these kings have to deal with. You want to own the companies that are able to continue to fund these dividend increases no matter what.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging 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.

About Warren Dockery

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