If you want to beat inflation when investing for passive income, dividend-growth stocks are your best bet. Stocks that consistently grow their dividends tend to outperform those that just have high dividend yields.
This is because they tend to consistently generate growing streams of earnings and cash flows. Often, businesses that generate dividend growth have strong competitive moats, great assets/services, and defensive business attributes.
If you want some dividend stocks that could potentially outperform inflation and even the market, here are three to consider today.
A defensive stock with pricing power
Canadian National Railway (TSX:CNR) may not be on a dividend investor’s radar, because its stock only earns a paltry 1.78% dividend yield. Over the past 20 years, CN has grown its dividend by a compound annual growth rate (CAGR) of 16%. Its dividend is up 19.5 times over that time!
CNR has a high-quality rail network that spans across Canada and the United States. Naturally, its business has very few competitors. As such, it has extremely strong pricing power. In fact, it can capture “inflation plus” pricing that tends to renew on an annual basis.
CN has a new chief executive officer who is looking to maximize efficiency and profitability across its business. At 20 times earnings, it is not the cheapest transportation stock. However, for a great business with a long history of solid returns, Canadian National is a top stock in Canada.
A top energy stock for dividend growth
Another top Canadian stock for dividend growth is Canadian Natural Resources (TSX:CNQ). For 22 years, it has grown its dividend by a CAGR of 22%! For an energy stock that is a miracle. The sector has a history of being extremely volatile. Yet CNQ has been able to do this because of its exceptionally high-quality operations and decades-long energy reserves.
The great news is that this pattern does not look to be shaken. After paying down a significant amount of debt over the past two years, CNQ is yielding a lot of excess cash (even though energy prices have moderated as of late). In fact, it can pay its dividend and remain cash flow positive even if oil prices hit US$30 per barrel.
Today, CNQ stock yields close to 4.5%. Last year, it raised its dividend twice and it also paid a special $1.50 per share dividend.
A top dividend stock for beating inflation
One dividend-growth stock that is a must own for beating inflation is Brookfield Infrastructure Partners (TSX:BIP.UN). 90% of its businesses are contracted/regulated and 75% of its earnings are indexed to inflation. Consequently, in the past few years, it has benefited from very strong organic growth across its business platforms
Its businesses are very defensive. They include railroads, ports, pipelines, natural gas processing, utilities, data centres, and cellular towers. The company has over $2 billion of liquidity, so it is very well positioned to buy assets, especially if they become cheap in a recession.
Despite strong earnings growth in 2022, its stock is down 7% over the year. It trades at a very attractive valuation and has a nice 4.5% dividend yield. It has more than a decade of annual dividend growth under its belt, and that is likely to continue for a decade ahead.