If you’ve noticed that the price you pay for goods and services is on the rise, you are not alone. While some degree of inflation is expected in a growing economy, inflation data released by the U.S. Bureau of Labor Statistics for June 2021 is nothing short of worrying.
Based on the year-over-year change in the Consumer Price Index for All Urban Consumers (CPI-U), the price of a large predetermined basket of goods and services is increasing by 5.4% year over year. This is the biggest increase in almost 13 years. Worse yet, if you exclude the costs of food and energy (known as the core CPI), prices are up 4.5%. It’s almost a 30-year high.
Suffice it to say that the money left out will quickly lose purchasing power if inflation rates stay at that level.
One of the smartest ways to fight inflation is to buy dividend-paying stocks that will offer a healthy combination of payouts and share price appreciation to more than offset rising prices for goods and services. The following four companies are some of the safest dividend-paying stocks on the planet and will help you crush inflation completely.
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Johnson & Johnson: 2.5% dividend yield
Although debatable, I would argue that the healthcare conglomerate Johnson & johnson (NYSE: JNJ), which is riding a 59-year streak of increasing its annual base payout, may be the safest dividend-paying stock on the planet. The reason is simple: it’s one of only two publicly traded stocks with Standard & Poor’s coveted AAA credit rating. In other words, S&P has more confidence that J&J will repay its debts than it does with the AA-rated US federal government repaying its debts.
Johnson & Johnson’s secret sauce has long been its operating structure. There are three main segments, each of which is a key part of the success of the business. For example, consumer health products may be the slowest growing segment, but they also generate the most predictable cash flows and sustainably strong pricing power. Meanwhile, J & J’s medical device segment is growing slowly for now, but is perfectly positioned to take advantage of the aging global population. Finally, Johnson & Johnson’s pharmaceutical division is responsible for most of the company’s sales and operating margin growth, although branded therapies have a limited period of exclusivity.
Health stocks are also very defensive. A stock market crash, a weaker economy, or rising inflation doesn’t suddenly mean fewer people are getting sick. Since we can’t choose when we get sick or what diseases we develop, J&J and its investors will benefit from predictable cash flow.
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Corporate Product Partners: 7.6% dividend yield
Oil and gas stocks are probably not the first thing that comes to mind when you think about security and crashing inflation. After all, the coronavirus-induced drop in crude oil last year wiped out drillers big and small. But if there is one stock in the Energy Complex that is particularly suited to helping you crush inflation, it’s the Mid-Level Master LP. Enterprise Product Partners (NYSE: EPD).
While changes in the price of crude oil, natural gas and natural gas liquids (NGLs) can touch the hearts of drillers (upstream) and refiners (downstream), the middleman companies that provide the infrastructure for transporting and storing oil, natural gas and NGLs often do not have these concerns. By relying on fee contracts, Enterprise Products Partners has a very clear vision of its cash flow generation, and can thus avoid investing too much capital, which would negatively affect its profitability and / or its dividend.
This transparency and predictability of cash flow has enabled Enterprise Products Partners to never fall below a payout coverage ratio of 1.6 in 2020. In other words, there is no doubt that it has the cash flow to cover its dividend, and is riding 22 years. a sequence of increases in its base annual payment.
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Innovative industrial properties: dividend yield of 2.7%
If you think oil stocks are a weird place to find solid dividends, imagine the look you’ll get from your friends when you tell them that your secret to putting inflation in its place is a marijuana stock that pays off. dividends, Innovative industrial properties (NYSE: IIPR).
Innovative Industrial Properties, abbreviated as IIP, is a real estate investment trust (REIT) focused on medical marijuana. In English, this simply means that it purchases cannabis cultivation and processing facilities with the aim of leasing those assets for long periods of time. By early July, IIP owned 72 properties covering 6.6 million square feet of rental space in 18 states. The key figure here is that 100% of its assets have been leased, with a weighted average lease term of 16.7 years. I think there is a good chance that IIP will fully recover its invested capital of $ 1.6 billion in less than eight years.
The lack of cannabis reform at the federal level in the United States also works in its favor. As long as marijuana remains a federally illicit substance, cannabis stocks will struggle to access basic financial services. IIP’s solution is its sale-leaseback agreement. IIP acquires properties for cash (giving pot stocks the capital they need) and immediately re-leases those assets to the seller, creating a long-term tenant. The transparency and predictability of IIP’s growth story make it a good bet to help investors beat inflation.
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Annaly Capital Management: dividend yield of 10.4%
While Johnson & Johnson is arguably the safest dividend-paying stock on the planet, Mortgage REIT Annaly Capital management (NYSE: NLY) may well hold the safest ultra-high yielding dividend stock. Although his return has fluctuated over the past two decades, he averages an annual payout of around 10%. So Annaly’s dividend alone is enough to put inflation in its place.
Annaly’s operating model is fairly straightforward to understand. It borrows money at lower short-term rates and aims to buy assets (mortgage-backed securities) that offer higher long-term returns. The difference between this higher long-term yield and its borrowing rate is called the net interest margin. For mortgage REITs, the first stages of an economic recovery (i.e. where we are now) are where they thrive. As the yield curve steepens, Annaly should be able to earn juicier long-term yields, thereby widening her net interest margin.
It should be noted that Annaly Capital Management has chosen a relatively safe path in the mortgage REIT arena. More specifically, more than 92% of its total assets are agency securities, as of March 2021. This means that they are protected by the federal government in the event of default. While this protection means lower long-term returns, compared to non-agency-issued securities, it also gives Annaly the ability to use leverage to her advantage in order to increase her profit potential.
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! 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.