Your eyes and wallet aren't deceiving you. The prices for the goods and services you buy on a regular basis have gone way up over the past year.
According to data from the U.S. Bureau of Labor Statistics (BLS), the inflation rate for February hit 7.9%, which is the highest level in four decades. With oil prices soaring in March, there's the real possibility we could be approaching a double-digit inflation rate when the BLS releases its March inflation report on April 12, 2022.
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Dividend stocks can put inflation in its place
While there are a number of investing strategies that could prove successful in a high-inflation environment, buying dividend stocks might just be the smartest strategy.
Nine years ago, J.P. Morgan Asset Management, a division of money-center behemoth JPMorgan Chase, released a report that compared the performance of stocks that paid dividends to companies that didn't pay a dividend over a period of 40 years (1972-2012). In this four-decade stretch, income stocks averaged an annual return of 9.5%. Comparatively, the non-dividend stocks scraped and clawed their way to a meager average annual return of 1.6%.
The fact that dividend stocks mopped the floor with non-dividend payers shouldn't be a surprise. Companies that pay a dividend are often profitable on a recurring basis, time-tested, and have clear long-term growth outlooks. These might be boring businesses, but they're just the type of companies we'd expect to increase in value over time. This is what makes dividend stocks such a smart play to combat historically high inflation.
What follows are three exceptionally safe dividend stocks that can help you crush inflation.
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Enterprise Products Partners: 7.14% yield
Among ultra-high-yield income stocks -- an arbitrary term I like to assign to companies yielding at least 7% -- there's arguably none safer than oil company Enterprise Products Partners (EPD -0.86%).
Understandably, there's liable to be some trepidation about putting money to work in oil stocks, as long as the memory of what happened in 2020 is still fresh in people's minds. The COVID-19 pandemic led to an historic demand drawdown in oil that decimated upstream drilling and exploration companies. But none of this came back to haunt Enterprise Products Partners for one simple reason: It's a midstream provider.
Midstream oil and gas stocks are the energy middlemen of the industry. In the case of Enterprise Products Partners, it controls approximately 50,000 miles of transmission pipelines, 14 billion cubic feet of natural gas storage space, and operates 20 natural gas processing facilities.
The company relies on contracts that have specified volume and price commitments, so there aren't any surprises with its operating cash flow. As a result, Enterprise Products Partners can outlay capital for new infrastructure projects and acquisitions without having to worry about adversely affecting profitability or distribution.
Speaking of distribution, at no point during the pandemic has this company's distribution-coverage ratio fallen below 1.6. This ratio takes into account the total amount of distributable cash flow relative to what's actually disbursed to shareholders. A figure below 1 would imply an unsustainable payout. Meanwhile, Enterprise Products Partners is riding a 23-year streak of increasing its base annual payout.
Best of all, with crude oil and natural gas prices hitting multiyear or multidecade highs, demand for additional drilling is also liable to increase. That's great news for an energy middleman that relies on transparent contracts.
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Philip Morris International: 5.05% yield
Another one of the safest high-yield income stocks that can help you smoke historically high inflation is Philip Morris International (PM 0.48%).
Tobacco stocks certainly fit the bill of "boring" business models that continue to make investors richer over time. Even though the growth heyday has passed for this industry, the addictive nature of the nicotine found in tobacco products affords these companies incredible pricing power. Despite tougher regulations on the tobacco industry in many developed markets, higher prices on premium products have modestly lifted sales.
One of the key advantages that really stands out for Philip Morris is the company's geographic reach. Though it doesn't operate in the U.S., it has a presence in more than 180 other countries. As tobacco regulations grow more stringent in select developed markets, Philip Morris is able to counter with higher growth from burgeoning middle-class consumers in emerging markets.
Despite relying heavily on traditional tobacco products, Philip Morris is also counting on innovation to drive its organic growth rate higher. The company's IQOS heated tobacco system ended 2021 with an estimated 6.8% share of the global heated tobacco market. For the full year, heated tobacco unit shipments soared almost 25% to 95 billion.
If you're still not convinced that you can trust Philip Morris International to help you crush inflation, take a closer look at the company's robust capital-return program. Last year, the company spent $785 million repurchasing its own common stock and is expected to dole out $7.75 billion in dividend income to shareholders this year. Since being spun out from Altria Group in 2008, Philip Morris has returned around $120 billion to its shareholders via dividends and share repurchases.
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Johnson & Johnson: 2.33% yield
A third extremely safe dividend stock that can help you put inflation in its place is healthcare-conglomerate Johnson & Johnson (JNJ -1.54%). Keep in mind that while J&J's yield is "only" 2.33%, its average annual total return, including dividends, has topped 10% over the trailing five years and 13% over the past decade. Both figures would handily surpass the prevailing inflation rate in the U.S.
One of the most fascinating things about Johnson & Johnson is that it's one of only two publicly traded companies to hold the highly coveted AAA credit rating from Standard & Poor's (S&P). This is the highest credit rating doled out by S&P and is one notch higher than the AA rating bestowed on the U.S. federal government. Put in another context, S&P has more faith in J&J making good on its outstanding debts than it does in the U.S. government paying back its debts.
On a broad scale, Johnson & Johnson benefits from the healthcare sector being highly defensive. Since we can't control when we get sick or what ailment(s) we develop, there's always a need for prescription medicine, medical devices, and healthcare services. No matter how well or poorly the stock market or U.S. economy perform, J&J can count on steady operating cash flow each year.
Another key to J&J's success is that each of its three core operating segments brings something to the table that the others might lack. For example, consumer health products is its slowest-growing division but boasts strong pricing power and highly predictable cash flow. Meanwhile, the medical-device segment provides a long runway to reach an aging U.S. and global population. Lastly, despite having a finite period of sales exclusivity, pharmaceuticals provide the bulk of Johnson & Johnson's sales growth and operating margin.
The icing on the cake is that Johnson & Johnson is widely expected to raise its base annual payout for a 60th consecutive year later this month. It's an incredibly safe stock investors can buy to tackle historically high inflation.
