Inflation Won't Go Away: 3 Dividend Stocks to Cash In With

These dividend stocks should deliver inflation-beating income growth.

It seems like higher inflation just won’t go away these days. The most recent Consumer Price Index (CPI) report showed prices rising 3.5% year over year. That was higher than expected, showing an acceleration in price growth. Inflation remains above the Federal Reserve’s target of around 2% annually.

While higher inflation is bad for the economy as a whole, it can benefit certain companies. Brookfield Renewable (BEP 0.19%) (BEPC 0.09%), Brookfield Infrastructure (BIPC -1.04%) (BIP -0.80%), and Marathon Petroleum (MPC -0.56%) stand out to these three Motley Fool contributors for their ability to cash in on higher inflation. It gives these energy stocks the fuel to pay higher dividends, providing their investors with inflation-beating income streams.

An inflation-driven boost

Matt DiLallo (Brookfield Renewable): While elevated inflation is challenging for many companies, it’s a boon for Brookfield Renewable. The renewable energy producer sells 90% of the power it generates under fixed-rate contracts with an average remaining term of 13 years. Those agreements supply the company with very predictable cash flow.

Most of those contracts feature clauses that link rates with inflation (70% of its revenue is indexed to inflation). That stable and steadily rising cash flow puts its high-yielding dividend (recently over 6%) on a very firm foundation.

Brookfield expects inflation escalators to power 2% to 3% annual growth in its funds from operations (FFO) per share over the next five years, assuming inflation moderates. However, higher inflation in the near term could drive up to 4% annual growth in FFO per share.

Inflation isn’t Brookfield Renewable’s only growth driver. It expects margin enhancement activities (e.g., providing ancillary services and capturing higher market prices on its uncontracted output) and its massive development pipeline to power another 5% to 9% in annual FFO-per-share growth.

On top of that, merger and acquisition activities should supply another boost. The company believes these catalysts should enable it to grow its FFO per share by more than 10% annually through at least 2028.

Brookfield’s growth drivers should provide plenty of power to continue increasing its high-yielding dividend. The company aims to grow the payout by 5% to 9% annually. That should enable it to deliver inflation-beating income growth in the coming years, even if inflation remains elevated.

Built for any economy

Jason Hall (Brookfield Infrastructure): It might seem unoriginal that my colleague Matt and I have chosen two subsidiaries of the same parent company. But they are quite different from one another, while also being similar in the ways that matter the most to answering this call.

With Brookfield Infrastructure, you get a collection of world-class assets that connect the modern world, including energy (moving and storing power, natural gas, and other commodities), data (data centers, broadband, and wireless), and transportation of people and goods.

Investors looking to both reduce the impact of inflation and potentially profit from it should consider this business. To start, its infrastructure assets are crucially important no matter the economy. Even as stubborn inflation weighs on capital investment and consumer spending, its operating assets will stay busy and generate lots of cash.

And a lot of its assets’ pricing structures factor inflation in, giving it the ability to raise the prices it charges as inflation moves ever higher. But at the same time, its operating costs are far less affected by inflation. It has high fixed costs, but the variable aspects of its operations don’t follow inflation exactly. That means more cash flow left over for its investors.

Yet the market’s misunderstanding of this business has sent its stock price falling over the past year, mostly based on worries about rising interest rates. As a result, savvy investors with a long time horizon can buy this business at what I think is the most attractive valuation in years.

With a dividend yield well above 5% and a strong record of raising its payout and delivering strong returns over the past two decades, I think now is absolutely the time to buy Brookfield Infrastructure.

Stay ahead of inflation with one of the fastest dividend growers in energy

Tyler Crowe (Marathon Petroleum): One misconception about investing to ward off inflation is to go for high-yield stocks. While these offer large cash payments now, higher-yielding stocks tend to grow their payouts at slower rates. Often, those rates are slower than the pace of inflation.

So rather than look for high yield, investors are likely better off looking for dividend payers with long track records of growing their payout at a high rate. Over the past 10 years, only 25 companies in the energy sector have grown them by 10% or higher. Marathon Petroleum is one of them, increasing its payout 14.6% annually over that time.

A fast-growing dividend in a no-growth industry like oil refining seems counterintuitive. But with few opportunities to spend on growth, Marathon returns substantially all of its free cash flow to investors through dividends and share repurchases.

Over the past 10 years, it has reduced its outstanding shares by 35% (including a significant all-stock acquisition in 2019). Reduced share count means the company can pay higher per-share dividends without spending more money each quarter.

MPC Average Diluted Shares Outstanding (Quarterly) Chart

MPC average diluted shares outstanding (quarterly); data by YCharts.

Demand for refined petroleum products will likely remain high for the next couple of decades, providing ample opportunity for the company to shower investors with more dividend payments and buybacks. If you are looking to beat inflation, few stocks will be able to do it better than Marathon Petroleum.

Jason Hall has positions in Brookfield Infrastructure, Brookfield Infrastructure Partners, Brookfield Renewable, and Brookfield Renewable Partners. Matt DiLallo has positions in Brookfield Infrastructure, Brookfield Infrastructure Partners, Brookfield Renewable, and Brookfield Renewable Partners. Tyler Crowe has positions in Brookfield Infrastructure Partners and Brookfield Renewable. The Motley Fool has positions in and recommends Brookfield Renewable. The Motley Fool recommends Brookfield Infrastructure Partners and Brookfield Renewable Partners. The Motley Fool has a disclosure policy.

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