Dividends can help you fight inflation

High-yield dividend stocks are an effective inflation-fighting investment. They are now coming back into favour after taking an unusual hit last year.

Even some of the bluest of bluechip companies cut their dividends in the pandemic year 2020.

But by now, they have restored their strong cash flows and their status as high-yield stocks.

Meanwhile, returns on most fixed-income investments remain disappointing.

The benchmark yield on Government of Canada 10-year bonds in 2022 is forecast at just 2.1 per cent.

While they are not classic growth stocks, these four ‘dividend kings’ also have respectable capital-gains potential

That’s lower than next year’s projected annual inflation rate of 2.2 per cent.

The stocks highlighted below each boast dividend yields of three per cent or more. And while they are not classic growth stocks, they also have respectable capital-gains potential.

And most would pass muster with investors adhering to the principles of ESG investing, or high environmental, social and governance standards.

Here are some of the “dividend kings” noted for their high dividend yields and their consistency in paying dividends.

■ bce Inc.: Canada’s largest telecom also pays one of the market’s richest dividends. The stock’s yield is 5.4 per cent. BCE shares are trading near their 20-year high, in the $65 range, limiting upside potential in the short term.

But profits have room to grow, having been relatively flat for the past five years. Revenue gains will come from BCE’s acceleration of its fibre-optic network expansion. BCE plans to increase its investment in network building by between $1.5 billion and $1.7 billion over two years.

In its most recent quarter, BCE was able to boost profits by almost 10 per cent, to $813 million, despite a slowdown in wireless device sales due to the market’s lack of enticing new gadgets.

Further revenue growth lies with a return to normal levels of immigration growth, BCE said.

And further lifting of travel restrictions will increase lucrative roaming revenue, which telecoms collect when wireless customers use their devices abroad.

■ Canadian Imperial Bank of Commerce: With a yield of 3.9 per cent, CIBC stock pays one of the highest dividends among the Big Six banks. It’s also one of the least expensive stocks in that group, trading at a price-earnings multiple of 11.

CIBC shares are trading close to their $153 high in early November. But there is upside potential in profits, which dropped by more than 25 per cent last year.

In its latest quarter, CIBC reported record quarterly revenues and a 45 per cent jump in adjusted net income. The bank posted doubledigit income growth over the same period a year earlier in all four of its major business units, including a quadrupling in net income, to $266 million, in its U.S commercial banking and wealth management division.

As part of its plan to diversify its credit card business beyond travel cards, CIBC acquired Costco Wholesale Corp.’s Canadian credit card business, which it hopes will bring new customers to its retail bank.

Last month, CIBC also committed an additional $300 million to its venture capital unit. CIBC is determined to become one of the big five U.S. venture-capital financiers to tech and life-sciences companies, including startups.

■ Atco Ltd.: Shares in the Calgarybased energy and logistics company boast a lofty dividend yield of 4.2 per cent. The firm’s stock has upside potential, currently trading almost 20 per cent below its prepandemic peak of about $52.

Atco is a dominant force in its original business of manufacturing modular buildings, for construction sites, Indigenous housing and many other uses. And its later expansion into energy distribution has it supplying electricity and natural gas in Canada’s Far North, Mexico and Australia, among its offshore markets.

Atco is also becoming a major North American player in solar power.

In recent months it has acquired three large solar projects in Alberta. The two it is building in Calgary, dubbed Barlow and Deerfoot, will be the largest urban-centre solar power producers in Western Canada.

■ Fortis Inc.: Shares in this large utility, with energy-delivery systems across North America, carry an impressive yield of 3.8 per cent.

Fortis, based in St. John’s, N.L., is a bit of a hybrid. It has solid incomestock credentials matched with impressive revenue growth that is seldom characteristic of stolid utilities. Revenues have grown in each of the past five years, by a total of 31 per cent. And in the last pre-pandemic year, 2019, profits more than doubled, to $1.7 billion.

Fortis’s planned capital spending of $19.6 billion by 2025 will expand its base of regulation-guaranteed rate increases of about six per cent per year.

That, in turn, underlies analysts’ expectations that Fortis will raise its dividend payout by about the same amount each year.

Much of Fortis’s increased investment is committed to renewable energy. That should attract ESG institutional investors to this big cap stock. Their heightened interest in the stock will help lift its value.

Happy investing. Be well and stay safe.