The best strategy for keeping up with inflation is to focus on companies yielding 2% to 5%, while delivering steady growth in their payouts. It's the smart bet over the long haul, advises Benjamin Shepherd, editor of Survival of the Fittest.
These stocks tend to be larger, blue chip companies that also have strong pricing power in their respective markets, so cash flows increase even as inflation heats up.
As a result, they're able to steadily increase their dividend payouts at a rate that ideally exceeds that of inflation.
Those same companies are also likely to be generating capital gains precisely because they're able to produce reliable cash flow and profit growth.
Between capital gains and growing dividends, investors are able to live comfortably in inflationary periods with a minimum drawdown on their investment principal. Below are two companies that fit the bill.
Over the past five years, Kimberly Clark (KMB) has grown its dividend by better than 3% annually, while generating a total return of 64.7%, thanks to the addition of capital gains.
Going back even further, it has increased its total dividend payout in each of the past ten years.
That's an extremely impressive performance from a company that mainly makes tissue paper, diapers, and feminine care products. The company does have exposure to commodity prices by way of paper pulp, making iconic brands such as Kleenex and Huggies, which are sold around the world.
However, it's able to pass much of any increase along to consumers. That, in turn, allows it to generously reward its investors with a payout ratio that holds steady in the mid-60% range, while reliably increasing the absolute dividend paid.
TransCanada (TRP) has increased its dividend as reliably as Kimberly Clark, sustaining a yield of about 4% and generating a total return of 58% over the past five years.
Maintaining a network of oil and natural gas pipelines and essentially collecting tolls on the volume of commodity moved, the company has little direct exposure to commodity prices.
But it is still able to maintain its pricing power to a large degree, because of the fixed nature of its network, giving commodity producers in the regions it covers little choice but to use its services. That allows it to maintain a higher payout ratio of about 75%.
Given the power of Kimberly Clark's brands and TransCanada's assets, there is little reason to doubt that both will be able to retain their competitive advantages over the long haul.
TransCanada is more economically sensitive; the company has cut its dividend once in the past decade, though it quickly made it up. However, both companies should be able to support their dividends and continue generating capital gains, year in and year out, even as the pace of inflation ticks up.
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