When it comes to creating passive income that lasts during inflation, dividend stocks can be the best way to gain growth and security. Yet among the dividend stocks out there, Exchange Income (TSX:EIF) could be one of the greatest options. Today, let’s look at why dividend stocks can help beat inflation, and why EIF might belong in your portfolio.
Why dividend stocks
First off, dividends provide a steady income stream, one that grows over time. And that income is usually attached to established companies such as banks, pipelines and utilities, companies that have a long history of dividends. Therefore, if inflation starts pushing up the cost of living by 2% or even 3%, having a dividend stock with a 5% to 7% dividend yield can not only keep your income safe, it can even grow. It’s a built-in inflation hedge.
Furthermore, dividend stocks are funded by actual cash flow. Dividend stocks can consistently pay and increase dividends if the stocks have a durable business model, as well as pricing power. This way, they can pass on higher costs to customers and protect margins. And that translates into reliable income, even if prices rise.
Now I’ve mentioned this several times, but it bears repeating: dividend stocks pay up. In an inflationary environment, this is huge. Not only are you receiving income that helps balance out cost-of-living increases during times of inflation, you can use that to grow your income through compounding. By automatically buying more shares, you can create a larger portfolio. So, let’s look at whether EIF fits the bill.
EIF
What makes EIF interesting is its business mix during an inflationary period. The company is into essential manufacturing, from aviation and aerospace to industrial services. The aviation arm provides services to Northern Canada, such as medevac operations and passenger flights. These are protected under long-term government contracts. The manufacturing segment is more cyclical, but adds diversification. Together, it’s a strong and resilient business.
This was seen during the dividend stock’s most recent earnings report. Its second quarter reported revenue of $720 million, a 9% increase year over year. Meanwhile, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) reached $177 million, climbing 13%. What’s more, free cash flow (FCF) rose 23% to $123 million, showing the business isn’t only growing; it’s also generating cash to sustain dividends.
Now, management has new EBITDA guidance of $35 million, showing more growth and income is on the way. Its dividend sits at $2.64 per share, with a payout ratio at 100%. That’s tight, but the dividend stock has a strong operating cash flow that supports it. While there’s little cushion, the trends of rising earnings and raised guidance are promising. Meanwhile, a $7,000 investment could bring in dividend income of $261 each year!
| COMPANY | RECENT PRICE | NUMBER OF SHARES | DIVIDEND | TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| EIF.TO | $70.12 | 99 | $2.64 | $261 | Monthly | $6,942 |
Bottom line
With a strategic acquisition of Canadian North, a new 10-year Air Services Agreement, increased guidance and a solid dividend, EIF looks like a promising stock – one that could hedge inflation even if it remains elevated. That makes EIF certainly worth watching on the TSX today.
