3 Dividend Ideas to Protect Your Portfolio Against Inflation

Amid widespread talk of surging inflation—including the Federal Reserve’s acknowledgment this past week that it is running hotter than anticipated—dividend stocks can offer a good hedge against rising prices.

That’s because with the pandemic getting under control in the U.S and elsewhere, many companies can raise their dividends annually faster than the rate of inflation.

But it’s not as easy as picking any old dividend payer. Chris Senyek, chief investment strategist at Wolfe Research, says that dividend investors need to be nimble and consider different strategies, depending in part on their time horizon. “There’s a rotation of strategies based on what you think is going to happen,” he tells Barron’s, pointing to the Fed, inflation, and higher interest rates as macroeconomic factors to consider.

Notes: Prices and returns as of June 15.

Sources: Wolfe Research; FactSet

One option is to ride out this potentially volatile stretch in markets with stocks that consistently raise their dividends, such as those in the S&P 500 Dividend Aristocrats Index. The Aristocrats have paid out a higher dividend for at least 25 straight years.

Another option would be to move up the risk spectrum. Senyek points out that “yield is still very cheap,” referring to higher-yielding stocks, or those in the top 20% of yielders among the largest U.S. companies by market cap. “That makes the sector overall very attractive, relative to other areas of the market.”

Consider that high-yielding U.S. stocks recently traded at about a 30% discount to the overall market, compared with an average discount of about 15% going back to the late-1980s, according to Wolfe Research. Drilling down, high-yielding stocks are cheap relative to their own valuation histories except in the consumer discretionary and materials sectors, the firm says.

Moving forward, Senyek points to three strategies that could make sense, based on the investing backdrop.

One is a risk-off stock rotation, in which case the market pulls back amid concerns about inflation and other headwinds. Under that scenario, he favors companies with a history of consistent dividend increases.

Those include


(ticker: MCD),











Johnson & Johnson

(JNJ), and


(MMM). Those companies, all

S&P 500

Dividend Aristocrats, are more defensive plays and offer yields in the 2% to 3% range—well above the 10-year U.S. Treasury note’s recent 1.5%.

Another scenario to consider: The market shrugs off inflation as a temporary concern and central banks keep rates low. Under those circumstances, Senyek would favor stocks with a combination of high dividend growth and high free-cash-flow yields.

Those include financial firms such as


(C) and

Goldman Sachs

(GS), along with

UnitedHealth Group

(UNH), and

Bristol Myers Squibb


The third possibility is that long-term interest rates move up slowly but not because of an inflation scare. “Value is likely to lead the market higher” in that scenario, he notes, adding that many higher-yielding stocks have a value bent.

That favors dividend stocks like


(T), though it is expected to cut its disbursement next year as it sells WarnerMedia assets,

Williams Cos.

(WMB), and

Altria Group


Senyek adds that higher-yielding stocks have “tracked very closely with value stocks in general.” The

Russell 1000 Value Index

has returned about 17% this year, roughly double its growth counterpart.

Looking further out, Senyek adds that “if you had just one dividend theme for the long term, it would be the consistent increasers for a buy-and-hold portfolio” akin to the Dividend Aristocrats. For investors who don’t have the time or inclination to trade stocks and toggle between strategies, that’s probably the best option in uncertain times like these.

A Rock Solid Dividend

Prudential Financial’s

(PRU) stock was recently yielding 4.4%, offering an attractive yield but one that was down considerably from where it’s traded in recent years as the share price has surged over the past 12 months.

Still, the dividend remains a key part of the insurance and asset-management firm’s capital-return priorities, based on what CEO Charlie Lowrey told Barron’s in a recent interview.

The dividend “is something you don’t mess with,” he says, adding that he’s committed to keeping payouts coming and growing.

The company did cut its dividend during the financial crisis in 2008, but it has increased it every year since 2009. In February the board declared a quarterly dividend of $1.15 a share, up nearly 5% from $1.10.

Share buybacks, meanwhile, are more discretionary than dividends, Lowrey says. The company reduced buybacks last year during the pandemic as a precautionary move, even as it maintained its dividend at $1.10 a share after increasing it to that level as the pandemic was just getting beginning to batter the U.S. in March 2020.

“We’ve always used buybacks as something we can increase or decrease, depending upon the need,” says Lowrey, a longtime Prudential employee who became CEO in 2018. “If you look at shareholder distributions over the past five years, it’s been roughly equal between dividends and share repurchases.”

Well, Isn’t That Special?

Asset manager

T. Rowe Price

(TROW) is in the S&P 500 Dividend Aristocrat Index, having boosted its regular quarterly dividend most recently in March by 20% to $1.08 a share—making 2021 its 35th straight year of higher payouts.

To celebrate the milestone, intentionally or not, investors are getting a special treat: The company said this past week that it will pay a special dividend of $3 a share, payable on July 7 to shareholders of record at the close of business on June 25.

Write to Lawrence C. Strauss at lawrence.strauss@barrons.com

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