Combat Inflation With Dividend-Paying Stocks

Combat Inflation With Dividend-Paying Stocks

In this era of high inflation, dividend-paying stocks can provide additional income and an important balance to an investor’s portfolio, offering more than just the yield produced by investment-grade bonds, contends an article in Barron’s. Dividend stocks have done relatively well during the massive selloff this year, declining about 11% compared with the S&P 500 and nondivdend stocks, which are down 19% and 23%, respectively. And the Bloomberg U.S. Aggregate Bond Index is having its worst year since 1988, down 16%.

A few factors are contributing to the solid performance of dividend stocks. Falling share prices have a cushion in payouts, and many dividend-paying stocks are found in value sectors which have been outperforming growth sectors this year. But dividend investors shouldn’t get too hung up on yields, Stephanie Link of Hightower Advisors told Barron’s, adding “it’s about dividend growth,  not high dividends.” Meanwhile, David Katz at Matrix Advisors says that dividends’ “sweet spot” is 3.5% to 5%, which is close to the current 10-year Treasury yield of 4%, though dividend payouts have the potential to rise while the payout for bonds is fixed.

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Banks in particular can offer attractive yields, the article maintains. While banks will encounter headwinds from a possible recession, they are certainly in better shape during this volatile time than they were in 2008, and higher interest rates could also boost net interest income, although that boost will cease once the Fed stops raising interest rates. Katz highlighted two stocks in his portfolio that are currently offering high yields: U.S. Bancorp at 4.5% and Truist Financial at 4.7%.

Meanwhile, the real estate sector has seen a plunge of 27%, but select real estate investment trusts (REITs) are currently yielding 5% to 6%, according to Barron’s. While an economic slowdown would hurt the sector, rent income would still provide in-flows, and REITs would still “maintain their dividends and continue to grow them” even in a shallow recession, Mathew Kirschner who manages the $5.4 billion Cohen & Steers Realty Shares fund, told Barron’s. He pointed to the Simon Property Group as a solid REIT currently yielding 6.6%, and the company just raised its quarterly payout in August. Kirschner also pointed to Realty Income, which specializes in commercial real estate for big retailers, is another REIT that has a solid track record of dividend raises. And Michael Knott, who heads up research of U.S. REITs at Green Street, highlighted Digital Realty Trust, which owns data centers. With available data center space dwindling, that could spur growth. Digital raised its quarterly payout 5% in March, and they could very well be on track for another raise soon, too.


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