No matter how well the stock market does, there are always a handful of catalysts waiting in the wings to cause a crash. At the moment, none seems to be causing more buzz than inflation.
Earlier this month, the Bureau of Labor Statistics reported that 12-month inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U), was 5.4% in June 2021. Yep since August 2008. Even more frightening, the core consumer price index (CPI-U minus food and energy) has risen 4.5%, the highest 12-month increase since November 1991.
Inflation can destroy the purchasing power of cash that sits on the sidelines. For this reason, an environment of rising inflation is the perfect time to consider buying high yield dividend stocks. The following five high-yield stocks can practically offset inflation with their generous payouts and offer potential for steady price increases.
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Kinder Morgan: 6.1% yield
Energy stocks are usually a good choice for hefty payouts and a midstream gas-focused provider Morgan children (NYSE: KMI) is no exception. The current return of 6.1% beats the rate of inflation, and the company's unique position within the energy complex makes it a good choice for modest stock appreciation in the years to come.
What investors get at Kinder Morgan is a mix of old and new. On the one hand, they get the predictability that comes with paid contracts. More than half of the company's sales are generated from these long-term contracts, which pay off regardless of whether or not its customers use its pipelines or storage facilities. The clear outlook and cash flow these contracts provide enable Kinder Morgan to carry out infrastructure projects without overwhelming itself and inadvertently jeopardizing its payout.
On the other hand, a company like Kinder Morgan is unaware of the changing energy landscape in the United States. It pursues opportunities in alternative energy that will build it up for a long time to come. These include the recent acquisition of the liquefied natural gas supplier Kinetrex Energy. As my stupid colleague Matt DiLallo notes in more detail, Kinetrex owns a 50% stake in a landfill facility for renewable natural gas (RNG), and more RNG facilities are in the works. RNG is Kinder Morgan's ticket to low-cost methane production and one of many steps the company will take to remain relevant as a highly profitable midstream operator.
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Walgreens Boots Alliance: 4.1% return
Given the need to spend big bucks on research and development, we don't expect high dividends from healthcare stocks. And yet, the predictability of the pharmacy operating model allows Walgreens Boots Alliance (NASDAQ: WBA) to achieve a return of more than 4%.
Walgreens is bringing big changes by embarking on a multi-point turnaround plan designed to fuel growth and improve operating margins. The company expects to have cut annual operating costs by more than $ 2 billion by the end of fiscal 2022 and has aggressively invested in digitization initiatives that will boost online sales and encourage repeat business.
Perhaps even more exciting is Walgreens' partnership with VillageMD, which was announced last year. The duo will be the first to open full-service clinics with medical staff in Walgreens stores. The aim is to develop up to 700 locations in over 30 US markets by the middle of the decade. While most in-store clinics can treat vaccines or treat colds, a full-service clinic is more likely to bring in chronic disease patients who can become lifelong customers at Walgreens' higher-margin pharmacy.
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Philip Morris International: 5% return
Though the high-growth days of tobacco stocks are long gone, Philip Morris International (NYSE: PM) can still deliver red hot returns for investors.
The great thing about Philip Morris is its geographic diversity. According to its own information, the company is represented in more than 180 countries worldwide. This means that it is able to offset potential volume weaknesses through growth from emerging markets when it comes under regulatory pressure in selected developed markets.
Because nicotine is addictive, Philip Morris, the company behind the Marlboro cigarette brand outside of the United States, has very strong pricing power.
But remember, Philip Morris is looking to the future. The company's heated tobacco system, known as IQOS, is gaining traction in a number of countries around the world. In the quarter to the end of the June quarter, sales of heating tobacco units rose by 30.2% compared to the same period in the previous year. The predictability of cash flow from cigarette sales coupled with IQOS 'high growth potential makes Philip Morris a surefire way to fight rising inflation.
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IBM: 4.6% return
A fourth high-yield dividend stock that can help contain inflation is tech-savvy IBM (NYSE: IBM). While it has been one of the tech sector's biggest laggards over the past decade, the long-awaited business transformation seems to be finally taking off.
The new IBM has focused on hybrid cloud solutions, that is, solutions that combine public and private clouds and enable data and applications to be shared between these services. Hybrid cloud solutions should be in particular demand after the pandemic, as they can be beneficial for remote workers and an increasingly data-driven world.
In the past 12 months, IBM generated $ 27 billion in cloud revenue, up 15% over the previous period. With cloud margins significantly higher than the company's legacy business, IBM's cash flow should grow faster as the cloud accounts for a larger proportion of total revenue.
One final note, while IBM's legacy segments slowed revenue, the company's cost reductions helped boost margins, resulting in healthy cash flow generation. Suffice it to say that IBM's return of 4.6% is rock solid.
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Annaly Capital Management: 10.2% return
After all, no list of high yield dividend stocks that could be bought now to curb inflation would not be complete without the Mortgage Real Estate Investment Trust (REIT). Annaly Capital Management (NYSE: NLY). Annaly is the high-water mark for return on this list at 10.2%, and it has averaged around 10% return over the past two decades.
The operating model of a mortgage REIT is actually pretty simple. Companies like Annaly seek to borrow money at lower short-term rates in order to buy assets with higher long-term returns. The difference between this higher long-term rate of return and the interest rate on debt is known as the net interest margin. The larger that margin, the more money Annaly can potentially make.
What investors should know is that in the early stages of an economic recovery, mortgage REITs often perform at their best, when the yield curve steepens. This happens to be the phase the US economy is currently in.
Another specialty of Annaly Capital Management is the focus on agency securities. In the event of a default, agency assets are funded by the federal government. With well over 90% of her assets in agency securities, Annaly can use leverage to her advantage to generate more income.
This article represents the opinion of the author who may disagree with the "official" referral position of a premium advisory service from the Motley Fool. We are colorful! Questioning an investment thesis – even one of our own – helps us all think critically about investing and make decisions that will help us get smarter, happier, and richer.
source https://seapointrealtors.com/2021/07/24/5-high-yield-dividend-stocks-to-buy-right-now-thatll-help-you-crush-inflation/
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