6 Dividend Growth Stocks That Beat Commodities for Fighting Inflation

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Is there such a thing as a meme metal? Humble nickel, used mainly to make stainless steel more workable, recently soared 250% over two days, driven by margin calls and a short squeeze, and led to a trading shutdown in London. Other commodities have been raging, too. Crude oil could soon test all-time highs, for reasons we recently discussed. And wheat has strung together consecutive days of going “limit up,” or hitting its maximum permitted price gain. 

Each of these moves is related to Russia’s war and resulting supply disruptions, and all add to concerns over inflation. Is it too late for investors to buy commodities to protect themselves? Careful there.

Deutsche Bank

writes that commodities, which began last year at extraordinary lows, still look cheap relative to other financial assets. But it also says that they could make a big move in either direction, and that their long-term returns have been poor. 

Over 150 years through last summer, the bank calculates, oil returned -0.42% a year after subtracting for inflation; wheat, -1.12%; and copper, -0.56%. That compares with a 6.57% return for U.S. stocks, after inflation and including dividends. 

Goldman Sachs
,
which predicts that inflation will top 6% through the third quarter of this year, has a better idea than loading up on commodities: Buy dividend-paying stocks. It writes that dividend payments for

S&P 500
companies are likely to grow by 7% a year, compounded, over the coming decade, and that the market is pricing in much slower payment growth. Also, the bank finds that stocks with high dividend yields and high payment growth have historically outperformed the market by a wide margin during periods when inflation has topped 6%. 

An exchange-traded fund of similar stocks,

ProShares S&P 500 Dividend Aristocrats
(NOBL), has lost 8% year to date, versus a 12% loss for the S&P 500. Goldman tracks its own basket of dividend champions, based in part on its forecasts for payment growth in the years ahead. It notes that this basket recently yielded 3%, or around double the S&P 500’s yield, and traded at a 34% discount to the index based on price/earnings ratios, deeper than the long-term average discount of 16%. 

A few stocks on the list have towering yields today, like

Verizon Communications

(VZ), 4.8%, which is only a modest dividend grower;

Devon Energy

(DVN), a shale driller with a fixed-plus-variable dividend that depends on profits, and whose yield could top 7%; and

Simon Property Group

(SPG), which owns upscale shopping malls and has snapped up some retailers, and pays 5.1%.

But many of the stocks have more moderate yields now and payments that are expected to grow by double-digit percentages. These include

T. Rowe Price Group

(TROW), which yields 3.6%; tool maker

Snap-On

(SNA), 2.8%; and semiconductor roll-up

Broadcom

(AVGO), 2.8%.

One stock not on the list is

Caterpillar

(CAT), which makes earth-moving and mining machines and was upgraded to Buy at Jefferies this week for its ability to prosper from inflation. It yields 2.1%, with payments expected to grow by 6% to 8% in the years ahead.  

Write to Jack Hough at [email protected]