These 3 Stocks Turn Inflation Into Surging Dividends

What the heck would a jump in inflation mean for our dividends? I’m getting that question from readers a lot these days, so today we’re going to take a closer look.

Then we’ll dive into three sectors—and three dividend payers (including one yielding an eye-popping 10%)—you’ll want to put on your radar now.

All three of these stocks boast high yields and/or strong dividend growth, plus big upside potential. Taken together, I expect their total returns to easily outrun any rise in inflation—and interest rates—we’ll likely see.

Money Printer Revs Up

The argument that we’re heading for a jump in inflation is pretty clear—a few days back, we saw the consumer price index (CPI), the go-to measure of inflation, pop 2.6% in March from a year ago, way more than expected.

Then there’s Fed Chair Jay Powell’s money printer, which is still stuck in the “high” setting, with 21% of greenbacks out there having been minted in the last year alone!

Rampant money printing and a pop in consumer prices are telltale signs that an inflationary period is bearing down on us.

But wait! Because there’s also reason to think inflation fears could be overblown. For one, gold, which typically rises in times of inflation, is doing the opposite.

And here’s something else to keep in mind: that March CPI number compares to March 2020, when the economy first went into shutdown. That means we’ll likely see similarly high numbers in the coming months, as today’s rebounding economy stacks up to 2020’s flattened one.


That will create the illusion of high inflation and rattle the mainstream crowd, who will swiftly conclude that we’re heading back to the 1970s.

They’ve already made that conclusion—over the past few months, they’ve been dumping 10-year Treasuries, which, in turn, drives up Treasury yields—the pacesetter for interest rates on everything from credit cards to mortgages. Heck, a Treasury bought today yields nearly double what it did in early January!

That leads me to the three sectors—and three specific stocks—we’re going to discuss today.

“Inflation-Proof” Play No. 1: An Energy Dividend That’s Growing Fast

Since May 2020 in my Contrarian Income Report service, we’ve been fixated on energy prices’ crash ’n’ rally pattern, which unfolded from 2008 to 2012 and is underway again.

Here’s how it typically plays out:

  1. First, demand for oil evaporates due to a recession. Oil prices crash.
  2. Next, energy producers slash costs and production.
  3. The economy recovers. Energy demand picks up.
  4. But there’s not enough supply! So oil prices climb.
  5. Energy producers bring supply back online, but it takes time to explore and drill. Supply lags demand for years, and the price of oil climbs and climbs.

We’re still early in this latest crash ’n’ rally pattern. We should assume that oil prices will keep climbing for the next two or three years at least.

My bet? Oil will clear $100 again before this rally is done—and if inflation does tick up, resource stocks are a natural hedge, because oil, gas, base metals, you name it—all rise with inflation.

We also want long exposure to oil because demand is outpacing supply at the moment.

According to the International Energy Agency (IEA)—the best source of industry information in my book—world oil demand will grow to 96.4 million barrels per day. Oil supply, meanwhile, is just 93.6 million barrels per day. With a three-million-barrel-per-day shortfall, the price of oil is going to keep climbing until that imbalance is resolved.

And Canadian Natural Resources (CNQ) is primed to capitalize. CNQ is the largest producer of heavy crude in Canada and a major natural gas producer, with properties in British Columbia and Alberta.

CNQ’s shares have bounced this year, along with oil, jumping some 34%. But they still have room to run, thanks in part to their bargain valuation: CNQ trades at just 11.5-times earnings as I write this.

You’re also getting a solid dividend, with management pulling off something few energy firms could last year: keeping the payout steady—and delivering a nice hike in December. All in all, CNQ’s payout has more than doubled (in Canadian dollars) in the last five years.

The fact that the company pays dividends in Canadian dollars also works in our favor, with the greenback expected to fall further versus its resource-powered Canadian cousin in the coming months. That would inflate our payout further.

“Inflation-Proof” Play No. 2: A Rock-Steady Infrastructure Fund Yielding 10%

Another way to beat inflation is to grab a closed-end fund (CEF) with a steady—and massive—yield. Even better if you can pick one up at a discount, as you will with the Duff & Phelps Utility & Infrastructure Fund (DPG).

DPG’s portfolio features a nice split between utilities, such as renewable-power leader NextEra Energy NEE (NEE); cell-tower REITs, like Crown Castle International (CCI); and pipeline operators, such as Enterprise Products Partners EPD (EPD).

That mix works well because utilities, including cell-tower landlords, will benefit from President Biden’s big infrastructure package, plus increased use of their services as more businesses come back online. And with DPG, we’re also getting access to expert managers who can shift the portfolio as conditions change.

But the big hook here is DPG’s big 10% dividend, which hasn’t flinched since the fund’s inception a decade ago:

A 10% Payout You Can Count On

Finally, the CEF trades at a 3% discount to net asset value (NAV, or the value of its portfolio) as I write this. It’s traded at premiums as high as 4% in the last year, so further upside from a closing discount is possible here, in addition to gains from the rising value of DPG’s holdings.

“Inflation-Proof” Play No. 3: A 5%-Paying Insurer That’s Absurdly Cheap

Insurance giant Prudential PBIP (PRU) boasts a 5% yield today, plus a payout that’s growing like a weed: up 64% in the last five years alone. And with a very safe 21% of free cash flow paid out as dividends, you can expect its dividend to keep rising.

The stock has bounced lately, as investors realize insurance stocks (which invest the premiums they collect in safe investments like Treasuries) are prime beneficiaries of rising rates.

But we still have a chance to buy in, because despite its recent gains, Prudential shares are only 3% above their pre-pandemic level. The stock also “breaks” just about every measure of valuation: it trades at just 8.4-times forecast 12-month earnings, for example, and just 57% of book value—or what its physical assets would be worth if they were sold off today. That means we get its global insurance business—and its well-respected brand—for free!

Management sees what a great deal the stock is: PRU has bought back 11% of its stock in the last five years. If you’re looking to add a top-quality insurer to your holdings, now would be a good time to join them.

Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: 7% Dividends Every Month Forever.

Disclosure: none

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