2 Stocks to Win the Race Against Inflation

Two Dividend Aristocrats outperform and underperform depending on economic conditions, but their rock-steady dividends help investors cope with inflation.

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The Bank of Canada is winning the race against inflation, as evidenced by the downward trajectory. From a peak of 8.1% in June last year, the rate went down to 5.9% in January 2023. However, Canadians still worry about the impact of the inflation crisis on their investments and how to win the race, too.

While rising interest rates can drive stock prices lower, it would be best to invest in Dividend Aristocrats for durable passive-income streams. Fortis (TSX:FTS) and Manulife Financial (TSX:MFC) outperformed in 2019 during a good year but lost in 2020 due to the global pandemic.

But despite the changing economic environment in the last four years, the dividend payments were never under threat. Both stocks are also doing well in 2023.

The next Dividend King

The TSX has only one Dividend King thus far, although Fortis is on the verge of being the second. This top-tier utility stock will mark 50 consecutive years of dividend increases if it raises dividends in 2023. The incredible feat is 100% sure, given management’s annual dividend-growth guidance of 4-6% until 2027.

Fortis boasts bond-like features and defensive qualities because of its regulated, low-risk, diversified income sources. The $26.66 billion electric and gas utility company has 10 affiliated firms that serve end users in Canada, the United States, and the Caribbean.

The new $22.3 billion five-year capital plan (2023 to 2027) is the largest ever for Fortis. Management expects the 6% steady rate base growth within the period to support its dividend-growth target. For the full-year 2022, net earnings increased 8% year over year to $1.33 billion.

Fortis trades at $55.09 per share (+3.09% year to date) and pays a 4.08% dividend if you invest today. Market analysts recommend a hold rating if you already own the stock. Their 12-month high price target is $65, or a return potential of nearly 18%.   

Progressive dividend hikes

Banks and insurance companies, including Manulife, are federally regulated financial institutions in Canada. During the breakout of COVID-19 in 2020, the Office of the Superintendent of Financial Institutions (OSFI) mandated to halt dividend increases and suspend share repurchases.

When the situation improved in 2021, the OSFI lifted the ban. On December 3, 2021, Manulife announced an 18% increase in the quarterly common shareholder’s dividends. The $50 billion insurance icon and financial services company lived up to its image of delivering progressive dividend increases.

Its chief executive officer Roy Gori expects the uncertainty and volatility in equity markets and interest rates to persist in 2023. Nonetheless, Manulife will earn a higher rate of return from the invested client deposits due to the high-interest rate environment.

Manulife is a Dividend Aristocrat owing to its dividend-growth streak of eight years. At $26.94 per share, the insurance stock outperforms the broader market year to date at +11.55% versus +4.17%. Current investors enjoy a juicy 5.46% dividend.

Tradeoff     

The capital gains from Fortis and Manulife may be less, if not stagnant. However, Dividend Aristocrats make up for it with steady, increasing, and rock-solid dividend payments. This pair of income providers can help investors cope with inflation and even win against it.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Christopher Liew has no position in any of the stocks mentioned. The Motley Fool recommends Fortis. The Motley Fool has a disclosure policy.

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