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4 Perfect Dividend Stocks That'll Help You Crush Inflation

By Sean Williams – Aug 7, 2021 at 6:06AM

Key Points

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These income stocks will put inflation in its place and cash in your pockets.

In case you haven't noticed, most of the things we buy are getting pricier. While it's perfectly normal for prices to rise over time in an expanding economy, the pace at which prices have risen over the past year is raising some eyebrows -- and not in a good way.

According to data released last month by the U.S. Bureau of Labor Statistics, the Consumer Price Index for All Urban Consumers (CPI-U) rose by 5.4% in June from the previous year. That's the highest trailing 12-month jump in almost 13 years. What's more, the Core CPI, which takes into account a predetermined basket of goods and services, minus food and energy, rose by 4.5%. That was the biggest trailing 12-month increase since November 1991.  

One of the smartest ways investors can counteract the effects of inflation is with dividend stocks. Since companies that pay a dividend are often profitable and have time-tested operating models, they can put money in investors' pockets via their payout and share price appreciation over time.

If you're looking for the right dividend stocks to add to your portfolio, I'd offer up the following four as being perfect to help you crush inflation.

A person holding an assortment of fanned cash bills.

Image source: Getty Images.

Bristol Myers Squibb: 2.9% yield

Given the substantive amount of capital devoted to research and development, we don't often think of healthcare stocks as prime-time dividend payers. However, pharmaceutical stock Bristol Myers Squibb (BMY 0.31%) brings the perfect blend of value and income (a nearly 3% yield) to the table for investors.

The Bristol Myers growth story is one part organic growth and one part big-time acquisition. On the organic front, Bristol and development partner Pfizer have watched Eliquis grow into the world's leading oral anticoagulant. Eliquis is currently on track to generate north of $10 billion in sales for Bristol Myers this year.  There's also cancer immunotherapy Opdivo, which generated $7 billion in revenue last year and is being examined in dozens of ongoing clinical studies. Label expansion is quite likely at this point, which could push Opdivo's sales even higher.

On the acquisition front, Bristol Myers made a splash with the buyout of cancer and immunology drugmaker Celgene in November 2019. Celgene's lead drug, multiple myeloma treatment Revlimid, has grown sales by a double-digit percentage for over a decade, and has benefited from label expansion, increased duration of use, and strong pricing power. Revlimid topped $12 billion in sales last year, and it's protected from a full onslaught of generic competition until the end of January 2026.

With consistent profitability, a drug portfolio that's unfazed by economic activity (i.e., people get sick no matter how high inflation is), and a minuscule forward-year price-to-earnings ratio of 8.5, Bristol Myers Squibb is a good bet to deliver on all fronts.

Multiple rows of meters on an electric panel.

Image source: Getty Images.

Duke Energy: 3.7% yield

One of the safest ways to fight back against inflation would be to put your money to work in electric utility stocks. Duke Energy (DUK -0.79%), the second-largest utility in the country by market cap, is the perfect example of dividend stock that can deliver for its shareholders.

Traditionally, electric utilities are slow-growing companies that parse out an above-average yield. Where Duke Energy aims to separate itself from much of its competition is in the growth department. The company plans to devote an aggregate of $58 billion to $60 billion to capital expenditures between 2020 and 2024, most of which will comprise clean-energy projects.  Between 2025 and 2029, CapEx is expected to hit as much as $75 billion. Even though investing in renewable energy isn't cheap, historically low lending rates, coupled with declining electric generation costs, will help lift Duke's organic growth rate.

Looking beyond these hefty renewable investments, Duke Energy also benefits from its traditional utility services -- i.e., those not powered by green-energy sources. Since electricity is a basic-need service for homeowners and renters, demand doesn't fluctuate much from year to year.

Further, since its traditional utilities are regulated by state-level public utility commissions, the company isn't exposed to potentially volatile wholesale electricity pricing. In short, Duke's cash flow is very predictable, which allows for substantial transparency when deciding on its capital outlays.

An IBM cloud data center.

Image source: IBM.

IBM: 4.6% yield

There's no sugarcoating the fact that tech stalwart IBM (IBM -0.33%) has badly lagged its peers over the past decade. The company's tardy entrance to cloud computing spurred a more than half-decade-long modest revenue decline. But after years of revamping, the IBM turnaround is finally taking shape.

The biggest nod for IBM is that it's delivering both organic and acquisition-based growth on the cloud front. In the June-ended quarter, IBM reported $7 billion in cloud revenue, which represents a 13% increase from the prior-year period. As a percentage of total quarterly sales, cloud now makes up a healthy 37% of revenue.  Since cloud margins are substantially higher than all of IBM's legacy operations, the company's operating cash flow should grow at a faster pace than sales for the foreseeable future.

It's also worth pointing out that IBM's hybrid cloud approach -- solutions combining public and private clouds, which allow for seamless data sharing between those respective services -- speaks perfectly to the hybrid work environment that's sprung up in the wake of the pandemic. Aside from being highly effective at helping for enterprises dealing with big data projects, the hybrid cloud is built to empower businesses with remote workforces.

Though it's still going to take time before we see IBM's revenue growth pick up on an organic basis, there'll be more than enough cash flow to lock in its 4.6% yield.

Ascending stacks of coins placed in front of a two-story house.

Image source: Getty Images.

Annaly Capital Management: 10.5% yield

Now, if you really want to put inflation in its place, and you want the dividend payout to do most of the work, the perfect stock to buy is mortgage real estate investment trust (REIT) Annaly Capital Management (NLY -0.41%). Annaly has averaged around a 10% yield for the past two decades and has paid out over $20 billion in dividends since its inception.

Mortgage REITs are interest rate-sensitive companies aiming to buy assets that'll maximize their net interest margin. Annaly, for example, borrows money at lower short-term lending rates and uses it to purchase mortgage-backed securities that have higher long-term yields. Subtracting the borrowing rate from the average long-term yield is how we arrive at the net interest margin. As you can imagine, the wider the net interest margin, the more profit Annaly has the potential to generate.

Typically, mortgage REITs perform their worst when the bond yield curve is flattening and/or when the Federal Reserve is rapidly adjusting its monetary policy. On the flipside, when the yield curve is steepening and/or the nation's central bank is telegraphing its monetary policy moves, mortgage REITs outperform. We're in the latter scenario at the moment, with a rebounding U.S. economy often conducive to yield curve steepening.

As one final note, keep in mind that Annaly almost exclusively buys agency securities. Agency assets are backed by the federal government in the event of default. As you can probably imagine, this added protection does lower the long-term yield netted by Annaly. However, it also allows the company to deploy leverage to pump up its profit potential.

Annaly Capital Management is arguably the safest ultra-high-yield dividend stock on the planet.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Bristol Myers Squibb. The Motley Fool recommends Duke Energy. The Motley Fool has a disclosure policy.

Stocks Mentioned

Annaly Capital Management Stock Quote
Annaly Capital Management
$21.79 (-0.41%) $0.09
International Business Machines Stock Quote
International Business Machines
$148.67 (-0.33%) $0.49
Bristol-Myers Squibb Stock Quote
Bristol-Myers Squibb
$81.13 (0.31%) $0.25
Duke Energy Stock Quote
Duke Energy
$99.52 (-0.79%) $0.79

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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