Inflation is becoming harder and harder to ignore. As a paper from Alerian notes, the CPI has increased 5.4% year over year, the Fed is likely to begin hiking rates as early as 2022, and income is increasingly challenging to find.
The COVID-19 pandemic pivoted a lot of spending away from services and towards goods, driving up the price of those goods. Dividends tend to be useful hedges against inflation, as dividend payouts are less volatile than earnings, and companies can set the price of their goods, allowing them to pass expenses onto the consumer. Even companies taking short-term earnings hits are reticent to cut dividends, as that can reveal overall weakness about a company’s financial position, which can deteriorate share value.
Where to Get Dividends As Inflation Sets In
There are two places where dividend-hungry investors can still find decent income: Midstream companies and REITs.
Midstream companies are a unique corner of the energy market, generating income by gathering and processing oil, natural gas, and hydrocarbons. Storage and transportation are also key services they provide. All of this is done through fees contracts. The long-term nature of these contracts makes midstream income consistent, but what makes the midstream an inflation superstar is that these contracts have standardized inflation policies baked into them. If inflation kicks in, the fees these companies charge increase.
For exposure to the midstream energy space, investors can find income in the ALPS Alerian MLP ETF (NYSEArca: AMLP), the JPMorgan Alerian MLP Index ETN (NYSEArca: AMJ), the Alerian Energy Infrastructure ETF (ENFR), and the ETRACS Alerian Midstream Energy Index ETN (NYSEArca: AMNA). Other funds with exposure to the midstream include the VanEck Vectors Energy Income ETF (EINC) and the Global X MLP ETF (NYSEArca: MLPA).
REITs have inflation protection built into them since real estate rental prices are directly tethered to inflation. Apartment leases happen over one-year periods, making it easy for residential REITs to adjust to new inflation realities quickly. Meanwhile, hotel prices can change daily, and real estate itself increases in value as inflation sets in.
To keep your income flowing with REITs, investors can kick the tires of the Vanguard Real Estate ETF (VNQ), the VanEck Mortgage REIT Income ETF (MORT), or the iShares Mortgage Real Estate ETF (REM).
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