What are we looking for?
Stocks with sustainable dividends and primed for growth even if inflation continues its rise.
The screen
Inflation in the United States accelerated to 3.7 per cent in September, driven by higher energy prices. (Canada’s 3-per-cent inflation rate for August is expected to hold steady for September.) It’s uncertain when relief for U.S. businesses and consumers will arrive given expanding conflict in the Middle East now threatening to block another key shipping route for oil.
Our analysts at The Successful Investor think the best strategy to minimize inflation’s impact is to buy dividend stocks likely to do just fine if price escalation continues or if inflation starts to slow. That kind of resilience often comes from being able to pass along higher costs to customers or holding hard assets that traditionally act as a hedge against inflation.
Opinion: Year-end tax ideas to help you keep more of your investment earnings
From a list of Canadian and U.S. stocks we identified leaders that do well during periods of inflation while paying sustainable dividends. We then applied our TSI Dividend Sustainability Rating System. It awards points to a stock based on key factors:
- one point for five years of continuous dividend payments
- two points for more than five
- two points if it has raised the payment in the past five years
- one point for management’s commitment to dividends
- one point for operating in non-cyclical industries
- one point for limited exposure to foreign currency rates and freedom from political interference
- two points for a strong balance sheet, including manageable debt and adequate cash
- two points for a long-term record of positive earnings and cash flow sufficient to cover dividend payments
- one point for being an industry leader
Companies with 10 to 12 points have the most secure dividends, or the highest sustainability. Those with seven to nine points have above average sustainability; average sustainability, four to six points; and below average sustainability, one to three points.
More about TSI Network
TSI Network is the online home of The Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough. They include our award-winning flagship newsletter, The Successful Investor, and the TSI Dividend Advisor. TSI Network is also affiliated with Successful Investor Wealth Management.
What we found
Our TSI Dividend Sustainability Rating System generated six stocks.
Toronto-headquartered Barrick Gold Corp. ABX-T will keep generating strong cash flow even if bullion prices fall. Meanwhile, the stock is a great hedge against inflation if investors look to the “safe harbour” of gold.
Gladstone Land Corp. LAND-Q, based in Virginia, will gain from land value appreciation as it’s one of the largest owners of farmland and farm-related properties in the U.S.
Purchase, N.Y.-based PepsiCo Inc.’s PEP-Q popular brands, which include Pepsi-Cola, Gatorade, Doritos, and Lay’s, all have very strong pricing power to pass on rising input costs.
Chicago’s Archer Daniels Midland Co., ADM-N which processes oilseed, corn and wheat, has a proven knack for offsetting rising costs with operational efficiencies to protect profit margins.
Nutrien Ltd. NTR-T, headquartered in Saskatoon, will profit from strong pricing power – its potash sales volumes hit a record in the first half of this year.
And finally, Brampton, Ont.’s Loblaw Cos. Ltd. L-T will continue to see steady demand for its grocery and pharmacy essentials, and the company keeps capturing consumers trading down to its discount banners (such as Maxi and No Frills) as inflation hurts affordability. Note: the modest dividend yield in large part reflects the stock’s impressive price growth over the past three years.
Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.