9 Dividend Stocks to Buy as Inflation Protection

These are 9 dividend stocks to buy as inflation protection.

January numbers from the consumer price index showed that prices rose 0.6% for the month, driving annual inflation to 7.5%. Robust end market demand, underperforming supply chain networks, high oil prices and rising wages combined to raise costs for both consumers and producers. High-dividend companies often have cyclical and defensive business models that hold up well when prices rise. Oil and gas, wood products, food inputs, and consumer staples companies benefit from strong pricing power and cost management, allowing them to raise prices, maintain demand and boost profits. What’s more, to combat inflation, the Federal Reserve is primed to raise interest rates several times in 2022, which bodes well for banks offering sizable dividends and deriving revenue from interest payments. With inflation not likely to subside anytime soon, here are nine dividend stocks to buy in favorable sectors as inflation protection.

Exxon Mobil Corp. (ticker: XOM)

West Texas Intermediate crude has risen more than 30% in the past six months, and energy is the market’s best-performing sector, with the S&P 500 Energy Index climbing about 55% in the past year. Outsize demand and lagging supply have pushed prices up, allowing producers to realize higher revenue while keeping expenses stable, contributing to growing margins and soaring profits. Fourth-quarter earnings from Exxon Mobil’s upstream segment, which explores for and produces crude oil and natural gas, increased 54% from the third quarter, to $6.1 billion, with higher realized prices accounting for $2.2 billion of that increase. This helped Exxon generate $48 billion of operating cash flow in 2021, more than enough to cover planned debt repayments, investment initiatives and the return of shareholder capital. Through its 88-cent quarterly dividend, Exxon returned $3.8 billion to shareholders last quarter alone.

Dividend yield: 4.4%

APA Corp. (APA)

APA is the holding company for Apache Corp., an upstream oil and gas company headquartered in Houston. In line with a sector-wide focus on shareholder returns, APA has implemented a framework that guarantees shareholders at least 60% of free cash flow through dividends and share repurchases. Through the first three quarters of 2021, APA notched $1.3 billion in free cash flow and increased its annualized dividend to 50 cents per share, a 100% increase from the previous level. What’s more, APA’s revenue grew 84% year over year, to more than $2 billion, and adjusted net income hit $372 million last quarter. CFRA’s chief investment strategist, Sam Stovall, notes that “in months where headline CPI increases year over year, Energy has been the second-best performer out of all … sectors, dating back to 1970.”

Dividend yield: 1.5%

Weyerhaeuser Co. (WY)

Weyerhaeuser maintains the most timberland in North America, with 11 millions acres owned in the U.S. and 14 million acres leased in Canada. Weyerhaeuser receives about 85% of sales from its wood products division and also maintains real estate, energy and natural resources segments. Full-year results, reported in January, showed that sales grew 36%, to $10.2 billion, while net income grew 227%, to $2.6 billion, as price increases outpaced added production costs. “In wood, pricing seems very strong,” says Bank of America research analyst George Staphos. On the heels of these results, WY declared a supplementary dividend of $1.1 billion in January — more than double its base dividend and its second such distribution of the last year.

Dividend yield: 1.6%

Boise Cascade Co. (BCC)

Boise Cascade has seen its stock rise more than 40% in the past six months — a period over which it was also padding dividends. The company operates through its wood products segment and its building materials distribution, or BMD, the latter of which makes up 79% of sales. Boise Cascade is the second-largest producer of both engineered wood product and plywood in North America. In the third quarter of 2021, income from wood products grew 85% year over year, to $122 million, on the heels of higher prices and volumes, while BMD income decreased 85%, to $16.6 million. That said, “significant gains in commodity prices during the month of December increase our confidence in a strong rebound in BMD gross margins,” says D.A. Davidson & Co. research analyst Kurt Yinger. BCC pays a quarterly dividend of 12 cents per share and paid out $5 per share in supplemental dividends last year.

Dividend yield: 0.6%

Tyson Foods Inc. (TSN)

Tyson Foods is the only big four meatpacking company to offer a dividend. The stock hit a 52-week high after 2022 fiscal first-quarter earnings showed that sales grew 24% and adjusted earnings per share grew 48% year over year. Tyson offset cost pressures with successful prices hikes — raising beef prices by 32%, chicken by 20% and pork by 13% — and decreasing its cost of sales from 89% to 84%. In addition, Tyson targets more than $1 billion in productivity gains by the end of 2024, potentially shielding it from further production cost increases. Sales topped $47 billion in 2021, and the company guides 2022 sales between $49 billion and $51 billion. That said, Bank of America Global Research analysts say “TSN’s consolidated sales outlook is conservative given strong realized pricing ($2.1 billion in aggregate in 1Q) which should continue through at least 2Q.”

Dividend yield: 1.9%

Altria Group Inc. (MO)

A classic dividend king, Altria produces and distributes iconic tobacco brands and, along with Philip Morris International Inc. (PM) and British American Tobacco PLC (BTI), is one of the big three tobacco companies. While consumers often modify their behavior in response to changing prices, tobacco is the classic economics example of an inelastic good, where changes in price do little to affect consumer demand. Tobacco’s high inelasticity should allow Altria and other tobacco companies to maintain pricing power over consumers and avoid depleting margins, positioning them well in an inflationary environment. Discussing the rotation toward defensive stocks, RBC analyst Nick Modi says, “MO disproportionately benefited from the rotation as one of the most defensive names in our coverage, given its limited exposure to cost inflation, US-centric business, and pricing power.” Altria targets a dividend payout ratio of approximately 80% and pays an annual dividend of $3.60.

Dividend yield: 7.2%

Fifth Third Bancorp (FITB)

Headquartered in Cincinnati, Fifth Third Bancorp is the largest bank in the Midwest. When interest rates rise, banks benefit because income from interest payments increases faster than interest owed to depositors. This difference, known as net interest margin, represents the primary source of revenue for most regional banks, and net interest income accounted for 60% of Fifth Third’s total revenue in the fourth quarter. Recently released guidance targets net interest income growth between 4% and 5%, with the potential for a 1.5-percentage-point increase from that range if rates rise earlier than expected. What’s more, “to combat inflation pressure, [Fifth Third has] $125 million in expense savings in 2022 driven by process automation, branch closures and renegotiating vendor contracts,” says Wedbush research analyst Peter J. Winter. FITB pays a quarterly dividend of 30 cents per share, with a payout ratio of about 30%.

Dividend yield: 2.4%

JPMorgan Chase & Co. (JPM)

Along with regional banks, big banks also stand to benefit from interest rate hikes. JPMorgan Chase is one of the nation’s oldest and largest banks, offering everything from checking accounts to wealth management to investment banking services. While big banks are more diversified than regional banks and receive less of their revenue from net interest income, they still stand to benefit. In the fourth quarter of 2021, JPMorgan received $13.7 billion in net interest income and $16.6 billion in non-interest revenue, which includes items like investment banking and management fees. “Higher net interest revenue levels that are generated through rising interest rates fall right to the ‘bottom line’ and can have a meaningful impact on EPS, in our view,” says RBC analyst Gerard Cassidy. Among the big banks, JPM has one of the best dividend yields and offers a quarterly dividend of $1.

Dividend yield: 2.6%

Newmont Corp. (NEM)

Gold has long been considered the classic hedge against inflation, and Newmont presents a chance to gain exposure to gold through the equity markets. Founded in 1921 and headquartered in Denver, Newmont is the world’s largest gold mining company, operating mines in Australia, North America, South America and Africa. Newmont expects to generate an additional $400 million in free cash flow for every $100-per-ounce increase in the price of gold. Newmont targets steady production over the next 10 years, guiding for between 6.2 million and 6.7 million ounces of production through 2023, and 6.5 million to 7 million ounces annually through 2025. “Newmont has established a good record of delivery on guidance, generation of positive free cash flow and operations in relatively lower geopolitical risk jurisdictions,” says CIBC Capital Markets research analyst Anita Soni. Newmont has the highest dividend yield of any major domestic gold producer and has a payout ratio near 80%.

Dividend yield: 3.6%

9 dividend stocks to buy as inflation protection:

Exxon Mobil Corp. (XOM)

APA Corp. (APA)

Weyerhaeuser Co. (WY)

Boise Cascade Co. (BCC)

Tyson Foods Inc. (TSN)

Altria Group Inc. (MO)

Fifth Third Bancorp (FITB)

JPMorgan Chase & Co. (JPM)

Newmont Corp. (NEM)

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