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What are we looking for?

Dividend sustainability under a surge in inflation.

The screen

The annual inflation rate in the United States jumped to a four-decade high of 7.5 per cent last month, with Canada not far behind – this week, it announced a 30-year inflation high of 5.1 per cent. It’s uncertain whether those key metrics will continue to rise or if supply chain improvements and the promise of interest-rate hikes will send them lower.

All in all, we think the best strategy for investors concerned about inflation is to buy dividend stocks that will do just fine if inflation returns to normal. At the same time, they have the potential to thrive in an inflationary environment. That includes having the power to pass along their own higher costs to customers or holding the kind of hard assets that typically thrive in inflationary times.

From a list of Canadian and U.S. stocks we identified leaders that do well with inflation while offering dividends. We then applied our TSI Dividend Sustainability Rating System. It awards points to a stock based on key factors:

  • 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

Six stocks with a sustainable dividend strategy for inflationary times

Ranking*CompanyTickerDiv. Sustain. RatingPointsDiv. Yld. (%)Mkt. Cap. ($ Bil.)**1Y Ttl. Rtn. (%) Recent Price ($)**
1Archer Daniels MidlandADM-NAbove Average82.143.037.376.90
2Tyson Foods Inc.TSN-NAbove Average82.034.143.994.45
3Nutrien Ltd.NTR-TAbove Average82.554.132.295.28
4PepsiCo Inc.PEP-Q Above Average72.6229.523.8166.30
5Gladstone Land Corp.LAND-QAverage61.81.064.930.62
6Barrick Gold Corp.ABX-TAverage61.846.82.828.21

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. **Share price and market cap are in native currency.

Toronto-headquartered Barrick Gold Corp. will keep generating strong cash flow even if bullion prices fall. Meantime, the stock is a great hedge against inflation for investors seeking the “safe harbour” of gold. Also, just this week, the company raised its dividend for shareholders.

Gladstone Land Corp., based in Virginia, is one of the largest owners of farmland and farm-related properties in the United States. Increasingly scarce agricultural land is a hard asset that becomes even more profitable as food prices rise. Purchase, N.Y.-based PepsiCo Inc.’s popular brands, which include Pepsi-Cola, Gatorade, Doritos and Lay’s, all have very strong pricing power to pass on rising input costs. Likewise, Chicago’s Archer Daniels Midland Co., which processes crops such as oilseeds, corn and wheat, has shown it can successfully raise prices for its customers to maintain profits.

Nutrien Ltd., headquartered in Saskatoon, will continue to profit from strong pricing power in a time of record global demand for fertilizer. And finally, strong sales for Arkansas-based Tyson Foods Inc. illustrate the meat packer’s room to raise prices to counter costs.

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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