Inflation is at its highest level in 40 years. The consumer price index (CPI) surged 7.9% over the last 12 months, the biggest spike since 1982. Unfortunately, the inflation rate might not cool off anytime soon, given the persistent supply chain issues and spiking energy prices following Russia's invasion of Ukraine.
This elevated level of inflation is painful as a consumer. However, some companies benefit from inflation, which can boost returns for their investors. Two inflation-fighting stocks to consider are Brookfield Infrastructure (BIPC -1.43%) (BIP -0.19%) and W.P. Carey (WPC -0.40%). Both offer attractive dividends along with inflation-powered earnings upside.
Brookfield Infrastructure highlighted its inflation-driven boost when it reported its fourth-quarter results last month. The global infrastructure operator grew its funds from operations (FFO) per share by 9% organically in 2021, fueled by elevated inflation levels, recently completed expansion projects, and higher volumes as the global economy recovers from the initial shock of the pandemic.
Brookfield benefits from inflation because of the structure of its contracts with customers. The company gets 90% of its revenue from government-regulated rates or long-term contracts, with 70% of those agreements indexed to inflation. That enables Brookfield to raise its rates as inflation rises.
The company also benefits from another inflation driver in higher commodity prices. Brookfield noted that about 25% of its midstream energy-related revenue has some market sensitivities. Given the surge in energy prices this year, these revenues should be higher.
This inflation-driven boost should enable Brookfield to deliver faster earnings growth this year. That will provide even more support for the company's 3.1%-yielding dividend. If inflation remains elevated for the next few years, Brookfield could grow its payout toward the upper end of its 5% to 9% annual target range.
An inflation-linked boost
W.P. Carey also expects inflation to help boost its results in 2022. The real estate investment trust (REIT) constructed its portfolio with properties secured by net leases. This structure makes the tenant responsible for maintenance, building insurance, and real estate taxes, which insulate it from expense inflation. Meanwhile, many of its net leases include inflation-linked rate increases, which CEO Jason Fox noted would "provide a meaningful tailwind to our growth" in 2022.
Overall, 59% of its leases feature CPI-linked rate increases (39% of which are uncapped). Another 37% of its contracts feature fixed rental increases, and 4% have other components that provide it with rental income upside. Because of these contract structures, W.P. Carey will collect more rental income in the coming year.
Another way W.P. Carey benefits from inflation is that it increases the value of its existing properties. Land, building materials, and construction costs are rising, making it more expensive to build new real estate. That drives up the replacement cost, making exiting buildings more valuable.
With inflation-driven rate increases providing visible growth in 2022, W.P. Carey's FFO should continue to rise without much effort. However, the diversified REIT expects to continue making investments that expand its portfolio. It anticipates acquiring $1.5 billion to $2 billion of properties this year, potentially exceeding last year's record $1.72 billion of investments. That's in addition to its planned merger with a real estate fund it manages.
These growth drivers should enable the REIT to continue increasing its 5.3%-yielding dividend. The company has a long history of giving investors a raise, having increased its dividend every year since its initial public offering in 1998.
Inflation-fighting income streams
Brookfield Infrastructure and W.P. Carey generate a significant portion of their revenue from inflation-linked contracts. With inflation on the rise, they can increase rental rates on most contracts this year. Along with their other growth drivers, that inflation-linked boost should enable both companies to continue growing their high-yielding dividends. That has the potential of helping them to deliver inflation-beating total returns.