Like it or not, inflation remains higher than Americans have been accustomed to, and the impacts of last year's price surge have not gone away. As of September, inflation as measured by the Consumer Price Index rate stood at 3.7%, and average prices were 12.2% higher than they were two years earlier. Indeed, consumers' costs are now more than 18% above where they were at this point in 2020. It is taking a toll on people's pocketbooks.
There are measures that investors can take to combat the impact of higher prices, however, and perhaps even outrun their rises. Buying the right dividend stocks could help even if their current dividend yields are modest. With that in mind, here's a look at three such dividend stocks to consider adding to your portfolio if you've got the inflation blues.
NYSE: MRK
Key Data Points
Merck
Its dividend yield of just under 2.9% at the current share price is respectable, but not exactly thrilling. Think bigger picture, though. Merck (MRK +3.13%) is a solid income-producing stock with great potential for capital appreciation. Let's also not forget how consistently (and how much) this company has grown its dividend payments.
Merck, of course, is one of the world's top pharmaceutical companies. Diabetes treatment Januvia, HPV vaccine Gardasil, and MMRV vaccine Proquad are all parts of its portfolio, although its biggest breadwinner right now is cancer-fighting drug Keytruda. That drug accounts for more than one-third of Merck's total revenue, yet its reach is still growing.
Keytruda is currently either being studied or being considered by regulators for approval in an additional 14 oncological indications. Drug industry research outfit EvaluatePharma estimates Keytruda's annual revenue will reach $24.3 billion by 2026 -- versus last year's tally of $20.9 billion -- en route to $30 billion in sales in 2030.
Its R&D pipeline looks quite promising as well. With its recent purchase of Prometheus Biosciences, Merck acquired a promising autoimmune disease treatment, and its 2021 purchase of Acceleron Pharma brought sotatercept into its portfolio. Just last month, Merck posted an encouraging update on sotatercept's development as a potential treatment for pulmonary arterial hypertension, positioning the company to address a market that could be worth on the order of $12 billion by 2030. That's more than twice that market's current size.
The point is, even before it absolutely has to have it, the company is setting itself up for future revenue growth. This habit is the key reason Merck has been able to reliably expand its annual dividend payouts at an annualized pace of more than 7% for the past five years.
NYSE: KO
Key Data Points
Coca-Cola
You certainly know the brand name. Coca-Cola (KO +0.74%) is one of the world's biggest distributors of beverages, and the biggest when it comes to soft drinks. It isn't just a seller of carbonated beverages, however. Coca-Cola owns an array of brands including Dasani water, Gold Peak tea, and Minute Maid juice. Its workhorses are its fizzy bottled drinks though.
The thing is, The Coca-Cola Company may not quite be the company you think it is. As a consumer, you can't tell (nor would you care), but Coca-Cola probably didn't bottle your favorite Coca-Cola drink. More likely than not, an independent bottler licensed to use the flavor and brand name did the work, paying the company a small royalty fee for the right to do so. Although the drinks giant did much of its own bottling at one point in time, it has spent the better part of the last few years easing its way out of the bottling business so it could focus almost exclusively on licensing.
End result? Less revenue, but more profit. As it turns out, profit margins on royalties and licensing are much higher than they are for bottling and packaging beverages.
KO Normalized Diluted EPS (TTM) data by YCharts.
This strategic shift has proven particularly prescient since 2021. Although inflation has soared since then, it's the bottlers bearing the brunt of the financial pain. Royalties and licensing agreements don't have operating and input costs.
It's a dynamic with significant implications for income-minded investors, too. The underlying income supporting Coca-Cola's dividend is well-protected as the company is not really feeling the pinch of inflation to the degree that others are. As long as consumers keep drinking the company's drinks, bottlers will keep paying Coca-Cola for the right to manufacture them -- even if they are selling those drinks for thinner profits.
At the stock's current price, Coca-Cola's dividend yield is 3.4%.
NYSE: AMT
Key Data Points
American Tower
Last but not least, inflation-weary income investors may want to take a closer look at American Tower (AMT +2.26%) while it's yielding nearly 3.9%. If you're not familiar with the company, American Tower owns 226,000 mobile phone towers spread all over the world.
The company is a real estate investment trust, or REIT. That just means it's a landlord of sorts, renting out space on its towers to wireless service providers like AT&T, Deutsche Telekom, and France's Orange. REITs offer a particularly advantageous thesis to income-focused shareholders. A REIT does not have to pay income taxes on the income that it passes along to shareholders in dividends, but in order to qualify for that favorable tax status, it must distribute 90% of its earnings via dividends every year.
The durability of this business is unquestionable. In the United States and around the world, people are practically addicted to their mobile devices. We literally suffer anxiety when we don't have them in reach. Even if the populace manages to curb our unhealthy levels of smartphone usage, demand for wireless connectivity is never going to go away.
That's good news for American Tower, as it sets the stage for a perpetual income stream which will in turn generate perpetual dividend payments. Not only has this company made dividend payments every quarter since the beginning of 2012, it has raised its annual payout every year since then at an inflation-beating average clip of around 4%.
AMT Normalized Diluted EPS (Quarterly) data by YCharts.
Its recent slowdown in dividend growth stems from a comparable slowdown in earnings growth. Analysts expect next year's bottom line growth to reaccelerate to the REIT's historical norms, though. American Tower's dividend will likely follow suit.
