Inflation is a beast that has yet to be tamed. As a result, the Federal Reserve will likely continue to impose large interest rate hikes, which could create volatility for the stock market.
To better position investors to thrive in the current macro environment, a panel of Motley Fool contributors have identified three income-generating stocks that can help you weather rising rates. Read on to find out why they think these high yielding dividend stocks are smart buys today.
This Cheap Telecom Stock Offers a Big Yield
Keith Noonan: Like most stocks, Verizon (VZ 0.52%) has certain characteristics that are not ideal for a rising interest rate environment. Perhaps more importantly, the company is heavily leveraged and higher rates could dampen its profits if the telecom giant were to refinance some of its existing loans under new terms. With earnings growing at a relatively slow pace, it’s also likely that the company’s next dividend increases will be below the current rate of inflation.
On the other hand, there’s also a lot to like about Verizon stocks right now. While payout growth will likely continue at a relatively slow pace for the foreseeable future, stocks are already offering an impressive 5.6% dividend yield that looks about as safe as you’d expect at this level of payment.
Despite some headwinds facing the company, Verizon has already generated $7.2 billion in free cash flow in the first half of 2022, or about 69% of the $10.4 billion in total dividends paid during from last year. The company has increased its payout every year for 15 consecutive years and will likely announce another increase next month.
With the stock currently trading at less than nine times this year’s expected earnings, the shares already look cheap and offer defensive potential in case the market takes another bearish turn. The combination of a large, well-hedged dividend and a conservative valuation makes Verizon a strong revenue play in a rising rate environment.
This Owner Doesn’t Fear Inflation…At All
James Brumley: WP Carey (WPC 0.24%) may not knock the socks off income seekers with its current yield of 4.8%. But this is a business not only designed to operate in an inflationary environment that drives interest rates up, but also designed to perform better and better even if the economy hits a headwind greater than the one currently blowing.
This stock is not a stock at all. It is a Real Estate Investment Trust (REIT). It just means that it owns a bunch of rental properties and passes most of its rents on to shareholders.
However, WP Carey is not your typical homeowner. It owns nearly 1,400 properties leased to 386 different commercial tenants in 15 different industries. Its main tenant is U-Haul’s self-storage business, although Advanced auto parts and Marriott also at the top of the list.
What makes WP Carey such a compelling prospect right now is the way his leases are structured. While just over a third of its leases are long-term leases at fixed rental rates, the same number is tied to the rate of inflation, with no cap. Another fifth of its leases also fluctuate with inflation rates, and while those rate increases are capped, it’s still a solid hedge against an unknown future. It’s also worth mentioning that the bulk of this company’s roster of tenants are types of organizations that can withstand economic weakness.
If nothing else, it’s a great way to diversify an overloaded stock portfolio of growth stocks.
A 6% return you can count on
Daniel Foelber (Kinder Morgan): The impacts of high inflation on a portfolio vary depending on the stage of the investment cycle. For example, young people whose wages also rise in response to inflation may be virtually unscathed. However, retirees who depend on investment income to maintain their lifestyle run a much higher risk of seeing their purchasing power decline.
One solution is to invest in quality companies that could increase in value over time and pay generous dividends. Pipeline and infrastructure giant Kinder Morgan clearly stands out as a winner.
Kinder Morgan stock has a dividend yield of 6%, which is almost enough on its own to offset inflation. Additionally, the company is not as prone to short-term fluctuations in oil and natural gas prices, as its long-term contracts guarantee predictable free cash flow. Kinder Morgan’s moderate downturn during the 2020 oil and gas crash is a good stress on the company’s resilience.
The long-term red flag for Kinder Morgan is its questionable relevance in a greener future. And while it’s true that demand for natural gas could fall over time, we certainly don’t see any indication of that right now. European demand for liquefied natural gas (LNG) is growing as countries seek to become independent of Russian supplies. Many of the world’s largest economies are energy dependent – relying on LNG exporters like Qatar, Australia and the United States for a growing share of their energy mix.
After years of underinvestment, Kinder Morgan has increased spending with major acquisitions in alternative fuels, as well as the expansion of Permian Basin pipelines in West Texas and Eastern New -Mexico to the Texas portion of the Gulf Coast.
Add it all up and you have a business in a growing industry with a very attractive dividend.
Daniel Foelber has no position in any of the stocks mentioned. James Brumley has no position in any of the stocks mentioned. Keith Noonan has no position in the stocks mentioned. The Motley Fool holds positions and recommends Kinder Morgan. The Motley Fool recommends Marriott International and Verizon Communications and recommends the following options: Long January 2023 $115 calls on Marriott International. The Motley Fool has a disclosure policy.