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What are we looking for?

Inflation-hedging dividends from top chocolate and confectionery makers.

The screen

Chocolate and candy are in the spotlight lately – and not just owing to the imminent arrival of the Easter Bunny. Notably, this week Ferrero Canada Ltd. expanded a recall affecting several Kinder-brand chocolate products on the possibility of salmonella contamination at a Belgium plant. More broadly, that scare is unlikely to quell consumer appetite for chocolate and other treats.

In fact, even as inflation cuts spending power, we think consumers will keep demand for these small, relatively inexpensive luxuries steady and rising.

From a list of candy, confectionery and sweet-snack makers, we identified dividend payers with solid growth prospects for their product lines. These stocks will do just fine if inflation returns to normal. At the same time, they have the potential to thrive in an inflationary environment by passing along higher costs to customers. We then applied our TSI Dividend Sustainability Rating System.

  • One point for five years of continuous dividend payments – two points for more than five;
  • Two points if it has raised the payment in the past five years;
  • One point for management’s commitment to dividends;
  • One point for operating in non-cyclical industries;
  • One point for limited exposure to foreign currency rates and freedom from political interference;
  • Two points for a strong balance sheet, including manageable debt and adequate cash;
  • Two points for a long-term record of positive earnings and cash flow to cover dividends;
  • One point if the company’s an industry leader.

Companies with 10 to 12 points have the most secure dividends, or the highest sustainability. Those with seven to nine points have above average sustainability; average sustainability, four to six points; and below average sustainability, one to three points.

More about TSI Network

TSI Network is the online home of The Successful Investor Inc. – the group of widely followed Canadian investment newsletters by editor and publisher Pat McKeough. They include our award-winning flagship newsletter, The Successful Investor, and The TSI Dividend Advisor. TSI Network is also affiliated with Successful Investor Wealth Management.

What we found

The sweet-tooth dividend: Chocolate as inflation hedge

Ranking*CompanyTickerDiv. Sustain. RatingPointsDiv. Yld. (%)Mkt. Cap. (US$ Bil.)1Y Ttl. Rtn. (%) Recent Price (US$)
1Nestle SA (ADR)NSRGY-OTCHighest101.9369.012.9132.26
2Mondelez International Inc.MDLZ-QAbove Average92.288.88.863.85
3Hershey Co.HSY-NAbove Average91.646.442.0225.58
4PepsiCo Inc.PEP-QAbove Average72.5239.620.9173.00
5Tootsie Roll Industries Inc.TR-NAbove Average71.02.513.136.25

Source: Dividend Advisor

*Ranking is determined by TSI Dividend Sustainability Score. Where overall points are the same, analysts considered P/E, dividend yield and industry outlook to decide final placements.

Our TSI Dividend Sustainability Rating System generated five stocks. Switzerland’s Nestlé SA is one of the world’s largest food companies, with several chocolate and confectionery brands including KitKat, Smarties, Aero and Quality Street.

Chicago-based Mondelez International Inc. has Cadbury and Sour Patch Kids among its own selection of treats. Also headquartered in Chicago is Tootsie Roll Industries Inc. Apart from its famous Tootsie Rolls, the company’s brands include Junior Mints, Charms Blow Pops, Cella’s Chocolate Covered Cherries and Dubble Bubble.

Consumers looking for somewhat healthier sweets increasingly turn to Purchase, N.Y.-based PepsiCo Inc. and its line of Quaker Chewy granola bars (many of which contain chocolate). And finally, Hershey Co., headquartered in Pennsylvania, also satisfies the consumer’s sweet tooth with Hershey’s Kisses, Jolly Rancher, Almond Joy and Reese’s Peanut Butter Cups, among its other brands. (Note: Italy-based Ferrero International SA is a privately held company.)

We advise investors to do additional research on any investments we identify here.

Scott Clayton, MBA, is senior analyst for TSI Network and associate editor of TSI Dividend Advisor.

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