No matter how well the stock market is performing, there are always a handful of catalysts waiting in the wings to cause a crash. At the moment, none seems to be stirring more of a buzz than inflation.
Earlier this month, the Bureau of Labor Statistics reported that 12-month inflation, as measured by the Consumer Price Index for All Urban Consumers (CPI-U) was 5.4% in June 2021. When taken as a whole, it's the largest one-year jump since August 2008. Even scarier is that the core Consumer Price Index (the CPI-U minus food and energy) rose 4.5%, representing the highest 12-month increase since November 1991.
Inflation can destroy the purchasing power of cash sitting on the sidelines. That's why an environment of rising inflation is the perfect time to consider buying high-yield dividend stocks. The following five high-yielding stocks can practically offset inflation with their generous payouts, as well as provide potential for steady share price appreciation.
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Kinder Morgan: 6.1% yield
Energy stocks are usually a good bet to deliver juicy payouts, and natural-gas-focused midstream provider Kinder Morgan (KMI 0.23%) is no exception. Its existing yield of 6.1% trounces the inflation rate, and the company's unique position within the energy complex makes it a good bet to deliver modest share appreciation in the years to come.
What investors are getting with Kinder Morgan is a mix of old and new. On one hand, they're getting the predictability that comes with fee-based contracts. More than half of the company's revenue is generated from these long-term contracts that pay off whether or not its customers use its pipelines or storage space. The clear outlook and cash flow these contracts provide are what allow Kinder Morgan to undertake infrastructure projects without overextending itself and inadvertently threatening its payout.
On the other hand, a company like Kinder Morgan isn't oblivious to the changing landscape of energy in the United States. It's been pursuing opportunities in alternative energy that'll set it up for a long time to come. This includes the recent acquisition of liquefied natural gas supplier Kinetrex Energy. As my Foolish colleague Matt DiLallo notes in greater detail, Kinetrex owns a 50% stake in a landfill renewable natural gas (RNG) facility, with more RNG facilities in the works. RNG is Kinder Morgan's ticket to low-cost methane production, and one of many steps the company will take to stay relevant as a highly profitable midstream operator.
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Walgreens Boots Alliance: 4.1% yield
Given the need to spend big bucks on research and development, we don't expect healthcare stocks to pay hearty dividends. And yet, the predictability of the pharmacy operating model allows Walgreens Boots Alliance (WBA 0.97%) to dole out a greater than 4% yield.
Walgreens is shaking things up in a big way by undertaking a multipoint turnaround plan designed to boost growth and improve its operating margins. The company expects to have pared back more than $2 billion in annual operating expenses by the end of fiscal 2022, and has been aggressively investing in digitization initiatives that'll boost online sales and drive repeat business.
Arguably even more exciting is Walgreens' partnership with VillageMD, which was announced last year. The duo will be the first to open full-service, doctor-staffed clinics in Walgreens stores. The goal is to open up as many as 700 locations by mid-decade in over 30 U.S. markets. Whereas most in-store clinics can handle vaccines or treat the common cold, a full-service clinic is more likely to bring in patients with chronic illnesses who can become lifelong customers at Walgreens' higher-margin pharmacy.
Philip Morris International: 5% yield
Although the high-growth days for tobacco stocks have long since passed, Philip Morris International (PM 0.34%) can still deliver smoking-hot returns for investors.
The great thing about Philip Morris is its geographic diversity. According to the company, it has a presence in more than 180 countries worldwide. This means if it's facing regulatory pressure in select developed markets, it'll be able to offset potential volume weakness with growth from emerging markets.
Additionally, since nicotine is addictive, Philip Morris, the company behind the Marlboro cigarette brand outside the United States, has very strong pricing power.
But keep in mind that Philip Morris is looking to the future. The company's heated tobacco system known as IQOS has been picking up steam in a number of countries around the world. In the June-ended quarter, heated tobacco unit shipments jumped 30.2% from the prior-year period. The cash flow predictability of cigarette sales, coupled with the high-growth potential of IQOS, makes Philip Morris a safe way to tackle rising inflation.
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IBM: 4.6% yield
A fourth high-yield dividend stock that can help put inflation in its place is tech stalwart IBM (IBM -1.22%). Though it has been one of the tech sector's biggest laggards over the past decade, its long-awaited business transformation looks to finally be taking hold.
The new IBM has gone all in on hybrid cloud solutions -- i.e., solutions that combine public and private clouds, allowing for data and applications to be shared between those services. Hybrid cloud solutions should be in particularly high demand following the pandemic given how beneficial they can be for remote workforces and an increasingly data-driven world.
Over the trailing 12 months, IBM has generated $27 billion in cloud revenue, which is up 15% from the previous period. Since cloud margins are markedly higher than the company's legacy operations, we should see IBM's cash flow growing at a faster pace as the cloud becomes a larger percentage of total sales.
One final note: Even though IBM's legacy segments have been a revenue drag, the company's cost-cutting has helped buoy margins, leading to healthy cash flow generation. Suffice it to say, IBM's 4.6% yield is rock-solid.
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Annaly Capital Management: 10.2% yield
Finally, no list of high-yield dividend stocks that could be bought right now to crush inflation would be complete without mortgage real estate investment trust (REIT) Annaly Capital Management (NLY 0.36%). Annaly is the high-water mark for yield on this list at 10.2%, and it's averaged about a 10% yield for the past two decades.
The mortgage REIT operating model is actually pretty simple. Companies like Annaly aim to borrow money at lower short-term rates to purchase assets that have higher long-term yields. The difference between this higher long-term yield and the borrowing rate is known as the net interest margin. The wider this margin, the more money Annaly can potentially make.
What investors should know is that mortgage REITs often perform their best during the early stages of an economic recovery when the yield curve is steepening. This just happens to be the phase the U.S. economy is in right now.
Something else unique about Annaly Capital Management is its focus on agency securities. Agency assets are backed by the federal government in the event of a default. Thus, having well over 90% of its assets in agency securities allows Annaly to use leverage to its advantage in order to generate more income.
Sean Williams owns shares of Walgreens Boots Alliance. The Motley Fool owns shares of and recommends Kinder Morgan. The Motley Fool has a disclosure policy.
