If you've noticed that the price you're paying for goods and services is on the rise, you're not alone. Although some degree of inflation is expected in a growing economy, inflation data released by the U.S. Bureau of Labor Statistics for June 2021 is nothing short of worrisome.
Based on the year-over-year change in the Consumer Price Index for all Urban Consumers (CPI-U), the price for a large, predetermined basket of goods and services is up 5.4%, year over year. That's the biggest increase in almost 13 years. Worse yet, if you strip out food and energy costs (what's known as the Core CPI), prices rose 4.5%. That's nearly a 30-year high.
Suffice it to say, money sitting on the sidelines is going to lose purchasing power quickly if inflation rates remain at this level.
One of the smartest way to combat inflation is to buy dividend stocks that'll provide a healthy combination of payouts and share price appreciation to more than offset the rising price for goods and services. The following four companies are some of the safest dividend stocks on the planet that'll help you absolutely crush inflation.
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Johnson & Johnson: 2.5% dividend yield
While debatable, I'd contend that healthcare conglomerate Johnson & Johnson (JNJ -0.69%), which is riding a 59-year streak of increasing its base annual payout, might be the safest dividend stock on the planet. The reason is simple: It's one of only two publicly traded stocks with the highly coveted AAA credit rating from Standard & Poor's. Put another way, S&P has more confidence that J&J will repay its debts than it does of the AA-rated U.S. federal government making good on what it owes.
Johnson & Johnson's secret sauce has long been its operating structure. There are three core segments, each of which provides a key component to the company's success. For instance, consumer healthcare products may be the slowest-growing segment, but it also produces the most predictable cash flow and sustainably strong pricing power. Meanwhile, J&J's medical device segment is growing slowly for the time being, but is perfectly positioned to take advantage of an aging global population. Lastly, Johnson & Johnson's pharmaceutical division is responsible for the bulk of the company's sales growth and operating margin, albeit brand-name therapies have a finite period of exclusivity.
Healthcare stocks happen to be highly defensive, too. A stock market crash, weaker economy, or rising inflation doesn't suddenly mean that fewer people are getting sick. Since we don't get to choose when we get sick or what ailments we develop, J&J and its investors will benefit from cash flow predictability.
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Enterprise Products Partners: 7.6% dividend yield
Oil and gas stocks probably aren't the first thing that comes to mind when you're thinking about safety and crushing inflation. After all, the coronavirus-induced plunge in crude oil last year decimated drillers big and small. But if there's one stock in the energy complex that's uniquely suited to help you crush inflation, it's midstream master-limited partnership Enterprise Products Partners (EPD 0.48%).
Whereas the changing price of crude oil, natural gas, and natural gas liquids (NGLs) can tug at the heartstrings of drillers (upstream) and refiners (downstream), midstream companies that provide the infrastructure to transport and store oil, natural gas, and NGLs don't often have those concerns. By relying on fee-based contracts, Enterprise Products Partners has a very clear outlook on its cash flow generation, and can therefore avoid outlaying too much capital, which would adversely affect its profitability and/or dividend.
This transparency and cash flow predictability ensured that Enterprise Products Partners never fell below a distribution coverage ratio of 1.6 in 2020. In other words, there's never been any doubt that it has the cash flow to cover its dividend, and it's riding a 22-year streak of increasing its base annual payout.
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Innovative Industrial Properties: 2.7% dividend yield
If you think oil stocks are a strange place to find rock-solid dividends, imagine the look you'll get from friends when you tell them your secret to putting inflation in its place is a dividend-paying marijuana stock, Innovative Industrial Properties (IIPR 0.06%).
Innovative Industrial Properties, known as IIP for short, is a medical marijuana-focused real estate investment trust (REIT). In English, this just means it purchases cannabis cultivation and processing facilities with the goal of leasing these assets out for long periods of time. As of early July, IIP owned 72 properties spanning 6.6 million square feet of rentable space in 18 states. The key figure here is that 100% of its assets were leased, with a weighted-average lease length of 16.7 years. I believe there's a very good chance IIP nets a complete payback on its $1.6 billion in invested capital in less than eight years.
Also working in its favor is the United States' lack of cannabis reform at the federal level. As long as marijuana remains a federally illicit substance, pot stocks are going to struggle to access basic financial services. IIP's solution is its sale-leaseback arrangement. IIP acquires properties for cash (giving pot stocks the capital they need), and immediately leases these assets back to the seller, thereby netting a long-term tenant. The transparency and predictability of IIP's growth story makes it a good bet to help investors trounce inflation.
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Annaly Capital Management: 10.4% dividend yield
Whereas Johnson & Johnson is probably the safest dividend stock on the planet, mortgage REIT Annaly Capital Management (NLY -0.32%) could well hold the title of safest ultra-high-yield dividend stock. Though its yield has fluctuated over the past two decades, it's averaged an annual payout of approximately 10%. Thus, Annaly's dividend alone is enough to put inflation in its place.
Annaly's operating model is pretty simple to understand. It borrows money at lower short-term rates and aims to buy assets (mortgage-backed securities) that offer higher long-term yields. The difference between this higher long-term yield and its borrowing rate is known as the net interest margin. For mortgage REITs, the early stages of an economic recovery (i.e., where we are now) are when they thrive. As the yield curve steepens, Annaly should be able to net juicier long-term yields, thereby widening its net interest margin.
It's worth pointing out that Annaly Capital Management has chosen a relatively safe route within the mortgage REIT space. Specifically, more than 92% of its total assets are agency securities, as of March 2021. This means they're protected by the federal government in the event of a default. While this protection does mean lower long-term yields, relative to non-agency securities, it also provides Annaly with the opportunity to use leverage to its advantage in order to compound its profit potential.
