Stocks with good inflation-proof dividends. How to find them?

Good dividends offer us stability and risk-adjusted income, perhaps they will not be as exciting as the Altcoin that generates 10% in a single day, but they are also interesting. Currently, the difference between the dividend yield of the S&P 500 and the 10-year US Treasury bonds is at its highest level in two decades. This tells us that these values ​​can be close to beating these returns. Therefore, we are going to teach you how to find stocks that offer us bulletproof returns (I mean, inflation) based on defensive business models.

What should be taken into account when looking for dividend yield?

The first and most essential thing is to look for actions that can maintain said dividends. That is, we must look for companies that do not finance their dividends based on get into debt or in sacrifice essential investments for capital growth. The characteristics of these companies are those that have large free cash flows (FCF) and in turn enjoy a high cash profit conversion. These are the ones that tend to show higher quality earnings and are therefore better able to maintain and increase dividend payments in the long term. Next we must pay attention to whether these dividends are sustainable while the management of the company is willing to keep them. Therefore, we must look for companies that have a consistent history of dividend payments, even during difficult economic cycles. This is because companies that have a well-defined capital allocation policy and repayment schedule tend to be the strictest when it comes to spending their capital. Finally, we should not only look at whether the dividend yield is attractive, the capital appreciation It is also important. This is because there are many companies that distribute good dividends because their growth expectations are low, while others are very cyclical and pay good dividends to compensate shareholders for the risk of the situation getting worse. Therefore, we must look for companies that enjoy a defensive growth and in turn they have a low correlation with markets.

Where to find these types of actions?

1. The energy sector

Stocks in the energy sector, and more specifically those in the oil and gas sector, have some of the highest dividend yields due to their strong cash generation and the lack of high-profit investment opportunities. These companies usually offer good results when the economy is strong, but weaker in environments of recession. Not to mention that the energy transition towards renewable sources is a great long-term threat for this sector, but in the short term they still enjoy strong demand. Furthermore, the reopening of China will put upward pressure on the demand for oil and gas and, consequently, the prices of both raw materials.

2. Midstream Master Limited Partnerships (MLPs) and Publicly Traded Partnerships (PTPs).

This type of companies they can afford to distribute good dividends thanks to its tax structure, since they reduce their cash tax obligations in United States. “Midstream” companies (if it sounds like Chinese to you, we will explain it to you in this detailed article about the oil industry) are those that are owners of energy infrastructure that connects “Upstream” companies with “Downstream” companies. Essentially, they do not produce oil or gas, but they participate in the logistics, such as the collection, processing, transportation and storage of both raw materials. Unlike energy companies, their income does not depend directly on the prices of both raw materials. These companies operate with business models based on rates, where income depends on output. The good thing about them is that you can get a clear view of the income streams because contracts are long term (from five to 20 years), with commitments of Minimum volume and inflation-linked fees. Growth and risks are similar to those in the energy sector, but without depending on volatility which means being linked to oil and gas prices.

3. Business Development Companies (BDC).

We know that being retail investors limits us a lot when it comes to accessing venture capital (VC) funds, but on the other hand, we can invest in business development companies (better known as BDC). These companies are like private funds that invest in the development and aid to companies that go through financial difficulties. Like venture capital funds, they have a risk relatively high, both for him leverage as for your exposure to small or struggling companies. These companies generate most of their profits from loan interest repayment or revaluations of its holdings in its portfolio companies. BDCs tend to pay good dividends because they are regulated investment companies and they can avoid the Corporation tax distributing close to 90% of its income among its shareholders. These companies are liquid investments because they are listed on the stock market, but their portfolio holdings are not.