Stock market investments are a popular hedge against inflation. In exchange for volatility in the short term, investors typically receive higher annual average returns than they could get through bonds or savings accounts.
Dividend stocks are even more attractive as inflation hedges because they provide instant income that rises steadily with each passing year. With that potential in mind, let's look at a few high-quality dividend stocks.
Read on for some great reasons to buy PepsiCo (PEP -0.41%) and Procter & Gamble (PG -0.03%) today.
1. PepsiCo
One of the key reasons to own PepsiCo stock is the ability to keep pace with inflation. The beverage and snack food giant's pricing power has been clear in its last few earnings reports. Prices rose by nearly 10% in the fourth-quarter period that ended in late 2022, for example, offsetting a slight decline in sales volume.
Pepsi beat management's growth forecast for the year as organic sales gains accelerated to a blazing 14%. "We are pleased with our results," CEO Ramon Laguarta said in February.
Investors are bracing for a slowdown in 2023, but this consumer staples giant has a good shot at growing sales even as it improves its profitability over the next several years. In the meantime, income investors can collect a strong and growing dividend. That payout in June will rise 10%, marking its 51st consecutive year of growth.
With earnings expected to improve by about 8% in 2023, dividend fans can look for a similarly strong increase in mid-2024. The yield today is sitting near 2.5%.
2. Procter & Gamble
Procter & Gamble recently announced a 3% dividend increase for 2023, which might seem underwhelming at a time when consumer price inflation has been closer to 7%. But the owner of dozens of essential consumer brands such as Charmin, Tide, and Head & Shoulders remains an excellent choice for income investors.
Organic sales rose 5% in the final quarter of 2022, for example, thanks to a 10% average price increase across P&G's portfolio. These increases put the company in a position to boost earnings over the next year even if sales volumes remain sluggish.
Ideally, P&G will return to a more balanced growth profile over the next few quarters, with growth coming from both higher prices and improving volumes. Yet, investors are likely to see continued market share growth in any case with organic sales on track to rise by as much as 5% again in 2023.
Earnings will likely be pressured by soaring costs and unfavorable exchange rate shifts, and these factors also probably played a key role in convincing management to boost the dividend at a modest rate this year. Still, these are short-term factors that don't threaten the wider bullish thesis for P&G stock.
The company converts nearly all of its annual earnings into free cash flow, and P&G routinely returns most of that haul to shareholders through dividends and stock buybacks. An expected $16 billion of returns in 2023 through those two channels should help cushion investors' overall returns while keeping their portfolio a bit more insulated against inflation this year. The current yield for this Dividend King is 2.5%.
