In July, financial pundits raised the alarm bells about inflation when the Personal Consumption Expenditures Index (PCE) rose 2.3% on a 12-month basis — the highest it’s been since 2012. The PCE is the Federal Reserve’s preferred inflation metric. July marked the only second time the Core PCE rate (with food and energy stripped out) hit 2% since 2012.
Though inflation remains near the Fed’s 2% target level, that may change as the U.S. economy begins to overheat due to rising interest rates. So the time is right for investors to take steps to inflation proof their portfolios.
One way to fight inflation in your portfolio is through dividends. When inflation is above 2%, a stock that yields more than that pays for itself, right? However, all yields aren’t created equal. Struggling companies will offer a “sucker yield” to entice gullible investors to buy stocks which otherwise wouldn’t be worth the paper on which they are printed. But I’ve found 3 inflation-proof stocks with dividends that are justified and stable.
Below are my picks for inflation-proof stocks.
Chubb (CB)
- YTD Return: -14.1%
- 52-Week Target: $158 (26% upside)
- P/E: 15.37
- Dividend Yield: 2.34%
- Dividend Growth: 52 years
- Payout Ratio: 28%
Like other insurance stocks, Chubb (NYSE:CB) has been hammered this year because of concerns about the impact of Hurricanes Florence and Michael on their bottom line. But for Chubb, those costs are covered by reinsurance.
Chubb is well-run and still reaping the benefits of Ace’s $29.5 billion acquisition of the company in 2016. Ace assumed the Chubb name after the deal closed. Rising interest rates will help Chubb boost the returns of its investment income, which is mostly fixed-income securities sensitive to interest rates. CB stock also is attractively valued and has a 26% upside.
Crown Castle International (CCI)
- YTD: -4.1%
- 52-Week Target: $118.19 (10% upside)
- Dividend Yield: 3.9%
- Dividend Growth: 3 years
- Payout Ratio: 80.2%
Crown Castle International (NYSE:CCI) stock offers investors a twofer — exposure to both the interest-rate sensitive real estate market and the fast-growing telecommunications sectors. As the owner of 40,000 towers, CCI is benefiting from the increasing growth in mobile data consumption and the launch of 5G services by wireless companies. CCI foresaw the demand for small cells needed for advanced services and invested billions into deploying the devices and connecting them to fiber. This investment should pay off even if inflation increases.
While the stats above may not look great for an inflation-proof stock, note that CCI is a real estate investment trust (REIT). This means that CCI must pay a certain amount of its income in the form of shareholder dividends each year, hence the high payout ratio.
PPL Inc (PPL)
- YTD: -0.32%
- 52-Week Price Target: $31.27 (1% upside)
- P/E: 15.34
- Dividend Yield: 5.3%
- Payout Ratio: 70.1%
- Dividend Growth: 6 Years
Odds are that most people have never heard of PPL Corp (NYSE:PPL), whose seven electric utilities serve customers in Pennslyvania, Kentucky, Virginia, Tennessee and the United Kingdom. The company, which also is in the electric generation, solar energy, and natural gas delivery businesses, will not be hard hit by inflation or rising rates. Regardless of what happens to the economy, people need to pay for electricity.
PPL shares are also attractively priced compared with larger rivals such as Southern Company (NYSE:SO) and Duke Energy Corporation (NYSE:DUK), which trade at multiples of 19 and 20 respectively.
However, PPL’s dividend yield alone makes the stock worth buying. A dividend yield of 5.3% should outpace inflation by large margin in even the most dire circumstances, making PPL one of the best inflation-proof stocks to buy.
As of this writing, the author was long CB.
