Worried About Inflation? 3 Reliable Dividend Aristocrats to Buy Now

The May 2022 Consumer Price Index (CPI) reading was a rude awakening for investors who may have hoped inflation was cooling off. Not so, as the CPI increased by 8.6% over the six months that ended May 31 — the largest increase since December 1981.

With the S&P 500, Nasdaq Composite, and Russell 2000 indexes all in bear markets, investors are looking for quality companies that have what it takes to come out of the other side of a prolonged downturn. Even better are dividend-paying companies that supply investors with passive income no matter what the stock market is doing.

Chevron (NYSE: CVX, Air Products & Chemicals (NYSE: APD), and Procter & Gamble (NYSE: PG) are three Dividend Aristocrats that could be worth buying now. Here’s why.

Image source: Getty Images.

Chevron benefits from the inflation hurting the economy right now

Lee Samaha (Chevron): With a 36-year history of increasing dividends, oil major Chevron is a favorite among dividend-seeking investors. While its current yield of 3.7% isn’t enough to offset soaring inflation, it is a bit higher than the U.S. 10-year Treasury yield. Also, remember that Chevron will likely grow earnings and dividends in the future.

The broader argument behind buying Chevron stock is simple. If high energy prices are, at least partly, responsible for the surge in inflation (which in turn is causing higher interest rates to be priced into the market), then it makes sense to buy stocks that profit from higher energy prices.

Chevron is undoubtedly one of them. The company has substantive downstream (post-production of oil) interests that help generate income when the price of oil is low. However, the reality is that its upstream (exploration and production) activities dictate its earnings and share price. For example, when the price of oil fell by 50% from 2014 to 2015, Chevron’s upstream earnings slumped from $16.9 billion to a loss of $2 billion, while the downstream earnings rose from $4.3 billion to $7.6 billion.

The good news is that the current rise in the price has taken Chevron’s first-quarter upstream earnings to $6.9 billion, compared to just $331 million for its downstream earnings. So, whichever way you cut it, high energy prices are good for Chevron; while they last, the stock will do well. So if you’re looking for a form of “insurance” for your portfolio along with some dividends, Chevron fits the bill.

Catch big air with this dependable dividend dynamo

Scott Levine (Air Products & Chemicals): Market volatility like we’re currently experiencing can be unnerving, rattling the resolve of new and experienced investors alike. But that doesn’t mean you have to sit idly by and wait for the market to recover. Fortifying your portfolio with proven dividend powerhouses like Air Products & Chemicals — which offers a 2.8% forward yield — can help you sleep better at night.

From its size — Air Products is the market’s largest publicly traded chemicals stock — to its history, which stretches back more than 80 years, there are several indications that the stock is a trustworthy choice if you’re looking to buttress your holdings. But one aspect that I find particularly alluring is the fact that it’s a Dividend Aristocrat. For nearly 40 years, Air Products has been returning an increasingly larger distribution to shareholders — that’s no small feat. The U.S. has seen a market downturn or two since the early ’80s, and all the while, Air Products has rewarded shareholders with growing dividends, so it’s fair to conclude that the company will continue to do so during the present volatility.

While inflation will adversely affect many businesses, Air Products is well positioned to withstand the current headwinds. The company’s industrial gases are indispensable to many of the industries it serves, including the energy industry, healthcare, and water treatment. Management foresees continued growth in 2022. During the company’s second-quarter 2022 earnings presentation, for example, it projected 2022 adjusted earnings per share (EPS) to increase 13% to 15% year over year. This forecast of adjusted EPS growth, and the company’s conservative payout ratio of 63% over the trailing-12-month period, are just two indications that the company will succeed in continuing to raise its payout to shareholders.

Despite challenges, P&G is one of the consumer staple companies best positioned for a recession

Daniel Foelber (Procter & Gamble): In less than two months, P&G has gone from around an all-time high to nearly 20% off that high. Little changed at P&G. But a lot changed in the broader market.

PG data by YCharts

The historically recession-resilient consumer staples sector is now down 15% from its all-time high. And a lot of that has to do with news from Target (NYSE: TGT) and Walmart (NYSE: WMT) that consumers are spending less on discretionary goods as inflation impacts buying power. Target followed up its disappointing guidance from mid-May with a statement on June 7 that included a new action plan to reduce its inventory, boost sales, and control costs. However, it also said it now expects its second-quarter operating margin to be just 2%, but that its second-half 2022 operating margin will improve to 6%.

An inflation-induced recession hits durable and discretionary goods harder than consumer staples. But it could even have ripple effects for P&G if consumers switch from its name-brand products to generic brands to save money.

Despite the short-term headwinds, P&G has the margins, the balance sheet, and the consistency to make it a long-term winning dividend stock. Unlike big-box retailers, P&G sports a much higher operating margin — usually above 20% compared to below 10% for Target and below 5% for Costco Wholesale (NASDAQ: COST) and Walmart. That gives it a lot of wiggle room to navigate rising costs.

With a 2.7% dividend yield and 66 consecutive years of dividend increases, P&G is a company you can count on to make it through a recession.

Daniel Foelber has positions in Walmart. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Costco Wholesale and Target. The Motley Fool has a disclosure policy.

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