Inflation is on. The consumer price index, a key measure of this development, rose 7.8% in the 12 months to the end of April. Therefore, I was looking for stocks to buy now for my portfolio that have a dividend yield above inflation. Here are three actions I’m considering.
With a dividend yield of 9.0%, the tobacco manufacturer Imperial Marks (LSE: IMB) offers a payout rate above inflation. Not only that, but the company’s progressive policy means it hopes to increase the dividend every year for years to come.
This increase may not be large – last year it was just 1% – but even if Imperial simply maintains its current dividend, the yield looks attractive to me. However, is it likely? After all, the company cut its dividend a few years ago and the cigarette market is in long-term decline.
While I see this as a threat to Imperial’s profits, the question for me is, how long is the long run? After all, cigarette sales have been steadily declining for several decades already in many markets, but last year Imperial still managed to post a profit of £2.9 billion. Its balance sheet is also in better shape than before, as it has paid off its debt.
For now, Imperial is trying to gain market share in five key countries. Along with its pricing power, this could help it continue to generate profits even in markets where cigarette sales volumes are declining. The company’s brand portfolio could also help it develop new sources of revenue in the future, for example in areas such as vaping. For now, I see Imperial as a cash cow. The good news is that I can benefit from some of the cash generated and paid out as dividends. That’s why I would consider buying shares of Imperial Oil for my portfolio.
The investment manager M&G (LSE: MNG) offers a lower dividend yield than Imperial. But at 8.5% it is still well ahead of the FTSE 100 average – and inflation.
Unlike tobacco, I think the total market size for its services may increase in the future. Financial services are an important part of a developed economy and I think future demand will be robust. M&G also benefits from a strong and well-established brand and reputation. This matters a lot in the field of investment management. If people or institutions entrust large sums of money to a company, they want to be reassured about its good reputation.
In addition to this, M&G’s stated policy is to maintain or increase its dividend each year. If it keeps its promises and I buy it today, I could get an 8.5% return. But since it’s well above the FTSE 100 average, how reliable is it? Does M&G’s stock price and yield suggest investor skepticism about its ability to sustain its payout?
The reality is that no dividend is ever guaranteed. A recession could cause clients to pay more attention to investment performance and adjust their portfolios accordingly. If M&G underperforms, it could see its revenues and profits plummet.
But I also think the opposite is true. M&G could actually see its business grow if its investment managers outperform rivals in other businesses. The company started this year promisingly, reporting net inflows of client funds. It is also currently buying up to £500m of its own shares. I take this as a sign of management’s confidence in the financial health of the company and would consider buying its shares for my portfolio.
Henderson Far East Income
The pandemic and government regulations continue to hamper business in some key Asian markets. This could explain why the Henderson Far East Income (LSE: HFEL) the investment trust has seen its share price fall 7.9% in the past year.
Coincidentally, 7.9% is also the current dividend yield. In other words, it may not seem like a big investment – an attractive dividend that only covers the capital loss. But that’s based on the past 12 months – what about the future? I think the trust’s exposure to Asian companies could help its performance in the years to come. A mix of pent-up customer demand and long-term growth trends could mean it will benefit from Asian economic expansion in years to come.
The trust pays dividends quarterly and has increased its payouts every year in recent years, although this is no guarantee that it will continue to do so. But its investment focus means trust managers are focusing on the types of holdings they believe could provide strong streams of income.
One of the risks associated with an income fund is that the managers are looking for yield, which can lead them to make poor investment choices over the long term. The trust’s five-year track record is not reassuring in this regard, with shares having lost 18% in value. Against this, there are two things.
First, the income was and remains substantial – if I was focusing on anti-inflationary income, I wouldn’t mind the stock price movement too much if I felt the long-term potential of his portfolio remained strong. Second, I think the recent weak stock price performance reflects the lingering jitters in parts of the Asian economy. If true, the current stock price of the trust could present a buying opportunity for my portfolio.
These three stocks all have dividend yields above the current rate of inflation. But things can change. Inflation could continue to rise. Meanwhile, inflationary pressures could hurt corporate performance and lead to dividend cuts.
But I think these stocks could be a good fit for my portfolio because each of them has the potential to make solid profits in the years to come. In different ways, each could turn a larger economic challenge into a business opportunity. Imperial can use its pricing power, M&G could benefit financial services clients looking for a new investment manager, and Henderson Far East Income could benefit from Asian economic growth.