Well, folks, the Consumer Price Index (CPI) came out Thursday and it’s just as bad as I expected. CPI soared to a 7.5% annual gain in January, exceeding economists’ estimates for a 7.3% increase. This marked the fastest rise in inflation in 40 years.
As I expected, energy prices were the main culprit for the inflation surge, as they rose 27% year-over-year last month. Even if you exclude food and energy costs, core CPI soared to a 6.0% annual pace in January.
The news sent shockwaves through Wall Street on Thursday. By the market close, the S&P 500, Dow and Nasdaq were down 1.8%, 1.5% and 2.1%, respectively.
So, why is the CPI so important? Well, it measures the average change in the price consumers pay for goods and services over time. It measures inflation.
Now inflation has been in the headlines for months. It’s all over the financial media and it’s a topic we’ve covered extensively in other Market 360 articles.
Today I’d like to take a step back and look at what inflation really is, what it means for the stock market and why fundamentally superior dividend growth stocks can be a way to protect your portfolio in an inflationary environment.
The Inflation Basics
Let’s start with the basics: Inflation is the steady decline in the buying power of a currency that in turn causes prices of goods and services to rise.
For the U.S. this means the value of a dollar has decreased — one dollar can buy much less than it once could. In the United States, inflation was around 7% in December, the worst number since the 1980s and a 400% increase from December 2020.
Unsurprisingly, people have begun panicking. The 10-year Treasury yield cracked 2% on Thursday.
But here’s the thing: there’s no need to panic. The reality is the fourth-quarter earnings announcement season has been better that many anticipated. In fact, it’s why Wall Street was able to brush off inflation fears earlier in the week and rally higher.
However, there’s no denying that inflation is here, it’s a problem, and it’s likely not going anywhere for some time. So, this begs the question: What do you turn to in an inflationary environment? Stocks, of course!
The fact of the matter is stocks remain an oasis in an inflationary environment. And more recently, dividend stocks.
See, dividend stocks are a great way to combat inflation. Companies that pay a sustainable dividend indicate a potential to grow and keep up with inflation. There is room for that company to increase dividends, which, in turn, allows them to raise prices and cash flow.
Stocks that increased their dividends amidst high inflation tend to outperform the broader market. Especially over long periods of time, like the current inflationary period.
But before you snap up shares in any dividend stock, remember that it’s all about picking the right dividend stocks.
The fact of the matter is we’re in the middle of a very strong earnings season. FactSet recently reported that of the S&P 500 companies that have reported results so far, 76% have topped earnings estimates and 77% have beat sales forecasts. In turn, the S&P 500 is now expected to achieve 29.2% average earnings growth for the fourth quarter, up from estimates for 21.3% at the end of December.
And earnings are working.
Case in point: Procter & Gamble Co (NYSE:PG). The company reported earnings for the second quarter in fiscal year 2022 on January 19. It beat analysts’ expectations on the top line with a revenue of $20.95 billion. Earnings per share also beat estimates with earnings of $1.66 per share, up 13% year-over-year. This strong performance caused PG to raise its sales growth outlook. Investors cheered the results, driving the stock more than 3% higher post-earnings.
PG is certainly a good stock. It rates well in Dividend Grader. As you can see below, it earns a B-rating for its Total Grade, making the stock a “Buy” right now.
But there are even stronger dividend stocks out there — like the ones I recommend in Growth Investor.
Take, for example, Regional Management Corp. (NYSE:RM). It is primarily a consumer finance company that offers safe and easy-to-understand installment loan products for clients with less-than-perfect credit and little access to credit from other lenders like banks and credit card companies. Customers can apply for loans from $600 to $25,000 and use these funds for a variety of things, including vehicle repairs, home furniture and appliances, holiday expenses, travel costs, medical expenses, debt consolidation and more.
Regional Management Corp. operates more than 350 branches in 13 states, which includes Alabama, Georgia, Illinois, Missouri, New Mexico, North Carolina, Oklahoma, South Carolina, Texas, Tennessee, Utah, Virginia and Wisconsin. The company plans to further extend its reach across the country by adding branch locations in five to seven new states in 2022.
On Wednesday, the company revealed “superior” fourth-quarter results, and in turn, the company also announced that it was increasing its quarterly dividend by 20%. During the fourth quarter, Regional Management’s loan portfolio grew by $112 million, which drove the firm’s stunning earnings and revenue results. Fourth-quarter revenue rose 23% year-over-year to $119 million, and earnings jumped 59.4% year-over-year to $2.04 per share. Analysts were expecting earnings of $1.84 per share on $116.41 million in revenue, so Regional Management posted a 10.9% earnings surprise and a slight revenue surprise.
Regional Management will now pay a first-quarter dividend of $0.30 per share, up from its fourth-quarter dividend of $0.25 per share. I should also add that the new dividend represents a 50% increase over the $0.20 per share paid in the first quarter of 2021. The new dividend will be paid on March 16 to all shareholders of record on February 23.
RM also earns the coveted AAA-rating, which means it holds an A-rating for its Portfolio Grader and Dividend Grader and Quantitative Grade. So, it offers the one-two punch of income and growth. It’s one reason why it’s one of my Top 3 Growth Investor Elite Dividend Payer stocks for February.
As you know, my focus at Growth Investor is fundamentally superior stocks — and as a result, our Buy List is showing tremendous relative strength in the wake of the recent inflation shock. At the time of this writing, my Elite Dividend Payers Buy List is up nearly 2% this week, compared to the Dow’s 0.3% rise and S&P 500’s 0.4% decline.
A big catalyst for my Growth Investor stocks is earnings season. Of the 32 Growth Investor Buy List companies that have released results so far, 25 have exceeded analysts’ earnings expectations, two posted in-line results and five missed. The average earnings surprise currently stands at about 13%.
What’s even more exciting is how my Growth Investor stocks have reacted in the wake of their positive quarterly results. The vast majority of our stocks have rallied higher, while the few that experienced a post-earnings dip firmed up within a couple days. I’m pleased to report that I’ve had earnings winners rally between 8% and 22%.
Earnings season isn’t over for my Growth Investor companies yet; in fact, I have 11 more companies on tap for next week.
So, if you missed out on my RM recommendation, that’s okay. I recently added two new fundamentally superior dividend growth stocks in the Growth Investor February Monthly Issue. These stocks also hold a AAA-rating. To learn more, simply sign up here now.
P.S. There is a great divide opening up in America — and investing in my Growth Investor stocks will help get you on the right side of it. On one side is a new aristocracy that’s amassing more wealth more quickly than any other group in American history. For people like me, the one percent, life has never been better, more prosperous.
On the other side, the opposite is happening. Wealth is flowing out of the pockets of ordinary Americans at an unprecedented rate.
What’s happening is only going to gather in strength over the coming decades. It certainly won’t weaken.
Few Americans even know that any of this is going on. I’ve never seen anyone from my side of the chasm step forward to explain any of these things.
It’s why I put together this video. In it, I’ll lay out exactly what is happening, including several key steps every American should take right now.
It doesn’t matter if you have $500 in savings or $5 million. You can benefit from the information in this video.
It’s free to watch, and by doing so, I know you’ll be ahead of everyone else struggling to understand what is really going on.
The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:
Regional Management Corp. (RM)