Rising inflation often causes concerns in the bond market, fearing that fixed coupons will be eroded by rising prices.
Just look at the 10-year US Treasury note. Its yield, which moves opposite to price, has jumped above 1.5% recently, falling from less than 1.2% at the start of August, as measures of inflation weakened. straightened. This is not the only factor at play. But core inflation was 4% year-on-year in August, well above the Federal Reserve’s 2% target rate and well above what it is. ‘she has been in recent years.
Enter dividend-paying stocks as an alternative. Even if higher inflation persists, dividend-paying stocks have an inherent advantage over other yield instruments, including their ability to cope with dividend increases above the rate of inflation.
Of course, one of the concerns for dividend-paying stocks is that “in an environment of higher inflation, there is more competition. [for yield]because bond rates will eventually rise, ”says David Katz, chief investment officer at Matrix Asset Advisors in White Plains, NY, which could weigh on stock price performance. The good news is that while bond yields have climbed, they remain low by historical standards.
Yet not all stocks are the same when it comes to resisting higher inflation and performing well.
Consider financial stocks, which tend to benefit from higher inflation and higher interest rates. This is in part because net interest income, or the gap between what these companies do on their loans and other assets and pay on their debts, is expected to increase. On Wednesday, financial stocks in the S&P 500 Index were roughly flat in September, second to energy among the index’s 11 sectors in a declining month.
Bill Nygren, co-manager of
funds (ticker: OAKMX), likes
(C), partly as a hedge against inflation. The action returns 2.9%.
“Like most of the banking industry, Citigroup would earn more on its deposits if interest rates rose, which would likely be the result of a higher inflationary environment,” Nygren said.
He points out that the stock is selling below book value and that the company’s relatively new CEO, Jane Fraser, is committed to increasing the bank’s return on equity. If that happens, he says, “I would expect the dividend to increase with earnings. “
Nygren also sees parts of the energy sector as a good hedge against inflation, citing an exploration and production company
(COP) as an example. The company recently announced that it would increase its quarterly dividend by three cents per share, or about 7%, to 46 cents.
“An inflationary environment would suggest higher oil prices and therefore higher profits and dividends” for the company, he said. The action returns 2.7%.
Katz, on the other hand, quotes
(KO), which earns 3.2%, as a good reopening game as travel, restaurants, sports venues and other places reopen in the wake of the pandemic. As of September 28, the stock was down about 5% in the previous two weeks. He thinks the stock’s return is high enough “even as inflation picks up.”
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“They’re going to handle the costs, but they’re probably the most leveraged for the reopening,” Katz said, referring to stocks of consumer staples. “If inflation picks up, there is a good chance that it will pick up in part because of the reopening.”
Another stock that he says should get solid inflation protection is
Bank of New York Mellon
(BK), which gives 2.6%.
A short-term rate hike should ease pressure on Bank of New York Mellon’s major money market activities, he said.
The bottom line: Dividend stocks can partially offset inflation, but investors need to know which ones measure up. b
Write to Lawrence C. Strauss at [email protected]