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3 Dividend Kings That Should Help You Pull Through Inflation in 2022

By Bram Berkowitz – Jan 3, 2022 at 7:15AM

Key Points

  • Dividend Kings are stocks that have raised their dividends for at least 50 consecutive years.
  • Cincinnati Financial is a property and casualty insurer that has raised its dividend for 61 straight years.
  • Commerce Bancshares and Farmers & Merchants Bancorp are strong-performing banks.

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These stocks have very consistent dividends and should also hedge against inflation.

Dividend Kings, which are companies that have raised their dividends for at least 50 consecutive years, are some of the most reliable passive income stocks that you will come across. These companies have managed to continue raising their dividends through several market crashes and bear markets, from Black Monday in 1987 through the COVID-19 pandemic now. The three Dividend Kings I will talk about below are also banks and insurance companies, which tend to be good hedges against inflation.

1. Cincinnati Financial Corporation

With nearly $30 billion in assets, Cincinnati Financial Corporation (CINF 0.58%) is mainly a property and casualty insurer that does business in 45 U.S. states as well as some business in London. More than $23 billion of Cincinnati Financial's assets are invested in fixed maturity investments and equity securities. Cincinnati's equities portfolio is impacted by changes in market prices and the company's largest equity holding is Apple, so a higher-rate environment may not be so great for some stocks in the portfolio.

But the equities portfolio is also concentrated with sectors that hedge inflation better, like financials and energy. Also, as management noted in the company's recent regulatory filing, a 1% instantaneous move in short- and long-term interest rates would grow the fair value of the company's fixed-maturity portfolio by nearly 5%, and enable the company to invest cash flow in securities with higher yields. Cincinnati Financial has now raised its dividend for 61 straight years and has a respectable dividend yield of 2.2%.

Stacks of coins in ascending order, left to right.

Image source: Getty Images.

2. Commerce Bancshares 

Commerce Bancshares (CBSH 2.10%) is a nearly $34.5 billion asset bank based in Kansas City, Missouri. This regional bank runs a good business, generating a return on average common equity of more than 16% through the first nine months of the year and a 1.65% return on average assets in the same time period. Return on equity shows the technical profit the bank generated on shareholders' equity, with a 10% return considered strong for most banks. Return on assets shows how well management used assets to generate profits, with a 1% return considered strong.

In its latest quarterly regulatory filing for the third quarter, management estimates that a gradual 1% rise in interest rates over the next year would result in more than a 5% bump in net interest income over the next year, which is what the bank makes on loans and securities after covering its cost of funding. Commerce has increased its dividend for 53 straight years and has a dividend yield of nearly 1.5%, which is probably better than it sounds considering the bank trades at more than 250% its tangible book value (what a bank would be worth if it were liquidated). That's a very strong valuation for a bank stock.

3. Farmers & Merchants Bancorp

With the smallest market cap of the three at roughly $758 million, Farmers & Merchants Bancorp (FMCB 2.00%) has roughly $5.1 billion in assets and is based in Northern and Central California. This is another strong-performing bank with a return on equity of nearly 15.4% through the first nine months of 2021 and a return on assets of nearly 1.4%. This company is not as sensitive to interest rate moves as the other two, but will still benefit a little bit. Because it trades on the over-the-counter exchange, Farmers & Merchants is also not as liquid as the other two stocks mentioned above. But the company performs well, the stock has a dividend yield of nearly 1.6%, and the bank has increased its dividend for 56 straight years. 

Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool owns and recommends Apple. The Motley Fool recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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