Investors only seem to care about one thing this year: inflation. They have reason to be worried. The consumer price index (CPI), a measure of inflation, hit 8.3% on an annualized basis in April (not seasonally adjusted). High inflation can make for a tricky environment for investors.
When inflation gets elevated like this, investors often turn to dividend stocks as a good source of returns. According to Fidelity, dividend stocks account for about 40% of the S&P 500's total returns each year, on average, since 1930. However, when inflation was elevated in the 1940s and 1970s, dividend stocks accounted for over 65% of the market's total returns each year.
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In inflationary times or in normal times, dividend stocks can also be a great source of passive income. A $15,000 investment in any of these three dividend stocks -- Prudential Financial (PRU 0.63%), United Bankshares (UBSI 0.52%), and U.S. Bancorp (USB 1.56%) -- could net you $500 or more annually in passive income and help you fight inflation. Let's find out a bit more about these three stocks.
1. Prudential Financial: $684 in annual passive income on a $15,000 investment
Prudential Financial manages investments for institutions and individuals, creates and sells retirement income products like annuities, and writes insurance policies like life insurance and group disability insurance.
The pandemic was tough on Prudential's business, and in 2020 the company posted its first annual loss in seven years. The company's group insurance and individual life insurance businesses struggled as it saw higher claims relating to the COVID-19 pandemic. It also struggled amid the low interest rate environment, which negatively impacted its investment earnings. Management saw this and has ruthlessly focused on improving the business, cutting less profitable products, and expanding into businesses that are less sensitive to market conditions.
One goal set in 2020 was to cut costs by $750 million by 2023. To accomplish this, Prudential sold off several businesses, including its Korea and Taiwan businesses and its full-service retirement business. These, and other moves, got it close to its 2023 goal, with $635 million in cost savings through the end of 2021.
Prudential Financial is positioned well with a strong balance sheet with $3.6 billion in liquid assets through the end of the first quarter. It will bring in another $4 billion in proceeds from businesses sold during the second quarter.
Investors will reap the rewards of this strong balance sheet, as Prudential plans to return $11 billion to shareholders from 2021 through 2023. In 2021 it paid out $1.8 billion in dividends and its payout ratio is a very manageable 37.2%. The company also increased its dividend by 4% in the first quarter, marking 14 consecutive years of dividend increases. The stock delivers investors a dividend yield of 4.56%.
2. United Bankshares: $576 in annual passive income on a $15,000 investment
United Bankshares provides banking services to customers all across the mid-Atlantic region of the U.S. It has branches in West Virginia, Virginia, Washington, D.C., Ohio, Pennsylvania, Maryland, and parts of the Carolinas. United Bankshares has expanded its business mainly through acquisitions -- which it has done masterfully. Since 1982, the bank has acquired 33 smaller regional banks. It closed on Community Banker Trust Corp. last year, adding more branches throughout Virginia and Washington, D.C.
United Bankshares' strategy of growth through acquisition has paid off for investors. The bank has increased its dividend annually for 48 years straight and would be considered a Dividend Aristocrats if it was a member of the S&P 500. It pays out $1.44 per share per year in dividends and the payout ratio is a very manageable 53%.
The bank also stands to benefit from higher interest rates. Last year, the federal funds rate, the benchmark interest rate at which banks use when lending each other money, floated between 0% and 0.25%. The Federal Reserve has increased this rate twice so far this year, bringing it to between 0.75% and 1%. The market projects this rate will exceed 2.8% by the end of this year.
Banks traditionally make money on the difference between the interest paid out on deposits and the interest earned on loans, called the net interest income (NII). United Bankshares projects that NII could increase 8% to 10% this year due to higher rates.
The stock delivers investors a dividend yield of 3.84%.
3. U.S. Bancorp: $534 in annual passive income on a $15,000 investment
U.S. Bancorp also provides banking services, across 2,200 branches spread through the Midwest and West regions of the U.S. It also happens to be one of Berkshire Hathaway's top 10 largest holdings (by value of the stock).
The bank boasts a strong balance sheet that can help it weather economic downturns. The common equity tier 1 (CET1) ratio is one metric that regulators use to see how well a bank can weather unexpected losses. It measures a bank's core capital divided by its risk-weighted assets, and banks must have a minimum ratio of 7%. U.S. Bancorp's CET1 ratio is a healthy 9.8%.
With a strong balance sheet in hand, U.S. Bancorp has patiently waited for interest rates to rise so it could take advantage. Last year, the bank sacrificed short-term profits from net interest income to take advantage of a more significant opportunity in higher interest rates in 2022 and 2023. It stands to see NII increase 3.3% over the next 12 months if interest rates rise another 2% from here and could make even more if lending activity picks up.
The bank pays out a quarterly dividend that amounts to $1.84 per share per year. That payout delivers investors a dividend yield of 3.56%. The payout ratio is a very manageable 40.5%.
