High Inflation: Beat It With Dividend Stocks!

High inflation is already upon us. As BBC News reported, the U.S. saw consumer prices jump 4.2% in the past 12 months. Price surges for certain goods can be even more ridiculous. Second-hand car prices rose 10% in April versus March. 

A part of that had to do with the shortage (and consequential price rise) in basic materials like steel. The situation is similar for other raw materials like copper and lumber.

We can say something similar for Canada as well — higher inflation and higher raw material costs. The annual inflation rate was 3.4% in Canada.

The Federal Reserve aims for a long-term inflation rate of 2%, as does the Bank of Canada. The Federal Reserve explains very well here how a stable rate of 2% helps with keeping maximum employment and consumer price stability. It further clarifies that an extended period of low inflation is likely to lead to a period of higher inflation (triggered by monetary policy), which is what we’re seeing now in both countries. 

At the very minimum, Americans and Canadians need to ensure their savings are earning at least 2% a year from interest income. Of course, we can do better than that with dividend stocks.

Beat High Inflation with This Dividend Stock

Sun Life (TSX:SLF)(NYSE:SLF) is a dividend stock that benefits from rising interest rates because the insurance company has a large fixed-income portfolio. The stock is awarded an A+ S&P credit rating. 

Additionally, it’s a Canadian Dividend Aristocrat and has maintained or increased its dividend for at least the past 20 years. The stock provides an initial yield of almost 3.4%. 

Barring a market correction, the fairly-valued stock can deliver annualized returns of about 12% over the next few years. 

Get a 4% Dividend?

Can you beat the long-term rate of inflation with a 4% dividend stock? For example, a lot of investors trust Realty Income (NYSE:O) and would buy it now. Its 4.2% yield beats inflation, right?

At the end of the day, stock investing is about total returns. Unfortunately, the stock is expensive today.

Source: F.A.S.T. Graphs – Realty Income stock appears expensive

Please don’t get me wrong. There’s no question Realty Income is a quality company with very stable funds from operations. However, because of that, the dividend stock tends to be expensive most of the time. Buying it on corrections to (at least) the normal P/FFO (the blue line) would be much safer and boost your initial yield much higher. 

Although getting a dividend yield that’s bigger than inflation is nice, take heed of the valuation you’re paying. At least, aim to pay a fair price as is the case with Sun Life right now. 

Chinese Growth Stocks Listed in the U.S.

Where there are risks, there could be higher returns. This year could be an incredible opportunity to accumulate quality Chinese growth stocks up to a certain percentage of one’s portfolio — 5%, 10%, or even up to 20%.

Alibaba (NYSE:BABA), Futu (NASDAQ:FUTU), and Tencent (OTC:TCEHY) could be good growth stocks whose total returns could greatly exceed inflation. Their three-year earnings-per-share growth rates are estimated to be 23-28%, 58-70%, and about 22%. 

Tencent is a dividend grower, although its yield is puny, and its dividend only contributed about 5% of its total returns in the past five years. (It recently increased its dividend by 33% in HKD.)

Source: F.A.S.T. Graphs – Alibaba stock appears to be a bargain

Notably, some of their risks lie in being more strictly regulated by the Chinese government and the possibility of being delisted from the U.S. exchange — especially Tencent for the latter. 

Despite their substantial corrections, BABA and TCEHY stocks’ five-year total returns have beat that of the iShares S&P 500 Growth ETF (NYSE:IVW).

BABA Total Return Level Chart

Total Return Level data by YCharts

Futu stock hasn’t been listed for five years yet.

BABA Total Return Level Chart

BABA Total Return Level data by YCharts

Expect volatility in these Chinese stocks. 

The Investor Takeaway

High inflation is nothing to be afraid of. Many stocks can deliver annualized returns of 8% or higher — at least 4x the long-term rate of inflation. Investors can choose stable performers like Sun Life stock, juicy dividend yielders like Realty Income, high growth stocks like Alibaba, or any other options in between. 

Keep your portfolio diversified and be careful of the valuations you are paying. Take calculated risks that are worth taking.

Share Your Thoughts

  • Do you see a problem with higher inflation?
  • Where are you investing to ensure you maintain your purchasing power?

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Disclosure: As of writing, we own shares of BABA, FUTU, and TCEHY.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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