Inflation clocked in at a rather high 7.1% in November 2022, although it was a decline from the peak of 9.1% set in June. While it is improving, outsized inflation has made it difficult for consumers to maintain their purchasing power. Efforts to combat inflation have made it tough for investors as well, lowering stock prices and shrinking portfolios.
It's times like these where dividend growth investing can come in handy. Companies that provide the world with the goods and services that consumers demand are still generating profits and delivering healthy dividends (and dividend hikes) to shareholders. Here are two stocks that appear to be excellent buys for investors seeking inflation-topping dividend growth.
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1. Altria Group: A Dividend King built around a timeless product
While cigarettes have only been a major tobacco product in the U.S. since the early 20th century, tobacco use dates back more than 8,000 years. The ongoing popularity of tobacco consumption is part of why it will likely continue in some capacity for many years to come. Tobacco producer Altria Group (MO -0.45%) is an excellent pure-play on that ongoing demand for the plant.
With its on! oral nicotine pouch brand, Black & Mild cigar brand, Copenhagen moist smokeless tobacco brand, and the world-renowned Marlboro cigarette brand, the tobacco giant enjoys unparalleled brand recognition in the States. And Altria Group's brand power continues to push revenue and earnings upward over time. It helps explain how the company's revenue net of excise taxes edged 1% higher in the nine months ended Sept. 30, 2022, not counting revenue from the company's now-divested wine business. As a result of these brands' contributions, analysts believe that Altria Group's non-GAAP (adjusted) diluted earnings per share (EPS) will compound at 4.2% annually over the next five years.
If the company's growth prospects weren't enough, the 8.2% dividend yield is nearly five times the S&P 500 index's 1.7% yield. And with the dividend payout ratio set to come in around 75% in 2022, the company should have no difficulty building on its half-century streak of dividend growth moving forward. Needless to say, an 8%-plus dividend yield paired with mid-single-digit annual dividend growth adds up quickly for income investors.
Best of all, income investors can scoop up shares of Altria Group at a forward price-to-earnings (P/E) ratio of 9.5. This is meaningfully below the S&P 500 tobacco industry's average forward P/E ratio of 13.5, which makes the stock a compelling pick for value investors as well.
2. Hershey: A brand portfolio widely loved by consumers
Hershey (HSY -0.17%) is known around the world for its deep bench of brands. These include the eponymous Hershey chocolate brand, the Skinny Pop popcorn brand, and the Twizzlers licorice brand.
These iconic brands helped Hershey produce a blowout third quarter: The company's net sales grew 16% year over year in Q3. And thanks to this outperformance, the confectioner was confident enough to raise annual revenue growth and annual adjusted diluted EPS growth guidance for the third time this fiscal year. Hershey now expects 14% to 15% net sales growth and adjusted diluted EPS growth for the current fiscal year.
As Hershey expands its product offerings via product launches and acquisitions, analysts anticipate that adjusted diluted EPS will grow at 10.5% annually through the next five years. The stock's 1.8% dividend yield is just above the S&P 500 index's 1.7% yield. And with the dividend payout ratio poised to come in just under 47% during the current fiscal year, double-digit annual dividend growth should persist in the future.
Hershey's forward P/E ratio of 27.3 is significantly more than the S&P 500 consumer staples sector average forward P/E ratio of 20.9. But quickly growing businesses with household name brands almost always demand sizable premiums over their peers. This is why I believe shares of Hershey are still a long-term buy for dividend growth investors.
