3 Safe Dividend Stocks to Beat Inflation

Long-term investing is challenging for retail investors. After all, the world of investing changes quickly.

From geopolitical concerns, high inflation, and rising interest rates, there is much to worry about.

Now the big worry all over the world is high inflation and how that will impact markets like India.

But despite all these challenges, the Indian retail investor has not lost hope.

One of the big reasons why the market scaled all-time highs recently is because retail investors kept faith in the market.

And one of the big reasons behind this faith is the steady income they have received from dividends.

Dividend stocks have provided stability to their portfolios during the volatile periods of 2022 and 2023. This in turn has helped bring in more money into the market.

This has proven to investors once again why dividends are so important, especially during periods of high inflation.

They provide investors with a steady income and a moderate return on their investment that can help them beat inflation.

This also provide an incentive for companies to increase their earnings, so they can pay an even higher dividend next year.

This is why dividend paying stocks have been shown to have higher returns than non-dividend paying stocks over long periods of time.

Even the father of value investing Benjamin Graham agreed when he said...

• The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operation results of his companies.

For investors looking to beat inflation with dividends, here are 3 stocks to have on your watchlist...

1. Power Grid Corporation

Established in 1992, Power Grid is among the biggest public-sector undertakings (PSUs) in India. Despite its modest origins, the company has expanded rapidly to meet the country's insatiable demand for electricity.

Along with having a monopoly status, the company has rewarded its shareholders with hefty dividends over the years.

Power Grid has declared two interim dividends for the financial year 2023 as well as a final dividend, resulting in a total dividend payout of Rs 14.8 per share.

The company's 5-year average dividend payout ratio is 54.3% and its current dividend yield is 5.9%.

Between 2018-2022, Power Grid's revenue grew at a CAGR of 7%. The net profit grew by 15.4% on CAGR basis on the back of cost-plus tariff structure.

To meet the growing power demand, the company plans to invest Rs 4.8 bn in three transmission projects.

Going forward, growth in renewable energy capacity, EV charging network, and 5G telecom is expected to drive Power Grid's revenue and profitability.For more details, check out the Power Grid company fact sheet and quarterly results.

2. ITC

ITC is a diversified conglomerate with businesses spanning fast moving consumer goods, hotels, paperboards and packaging, agri-business, and IT.

The company is the country's leading FMCG firm and the market leader in the Indian paperboard and packaging industry.

In the agri sector, it's acknowledged globally as a pioneer in farmer empowerment through its wide-reaching agri business. In the hotels segment, it's a pre-eminent hotel chain in India.

For years, ITC was planning to gradually shift towards an asset-light model in the hospitality sector for further expansion. It's only now that the words have been put to action with its hotel business demerger plan.

Over the last decade, ITC has successfully created an array of strong brands which are either #1 or #2. They are market leaders in their respective categories.

ITC has always been considered as an attractive dividend play. Right from humble beginnings in 1994, the company has rewarded investors with a higher payout compared to its peers.

This is the one thing that makes ITC stand out. Over the years, the company's management has laid out a flexible capital allocation policy. It has said that dividend payouts will be stepped up to about 80-85% of its post-tax profits.

In financial year 2022-23, ITC paid out Rs 15.5 per share as dividends. ITC has been paying dividends since 1994 without missing a single year in between.

ITC's dividend payout ratio in financial year 2022-23 was almost 100%. The company has come a long way in increasing its payout. Between 2003 and 2009, the company had a modest payout ratio ranging between 30-40%.

The company's 5-year average dividend payout ratio is 84.8% and its current dividend yield is 3.3%.

For more details, check out the ITC company fact sheet and quarterly results.

3. Hindustan Aeronautics

Hindustan Aeronautics manufactures and maintains aircraft and helicopters for the Indian Airforce, Indian Army, ISRO, Indian Navy, and Indian Coast Guard, among others.

Recently, HAL signed a US$ 716 m deal with GE Aviation for the supplies of engines.

It has also set up a Rs 2.1 bn Integrated Cryogenic Engine Manufacturing Facility (ICMF) that would cater to the entire rocket engine production under one roof for ISRO. This will eventually result in higher profits for the company.

Since 2008, the company has declared regular dividends. In the financial year 2023, the company declared a final dividend of Rs 55 per share, with a dividend payout ratio of 31.5%.

The five-year average dividend payout ratio stands at 33.8%. The current dividend yield is 1.4%.

Defence stocks in India have garnered significant interest for quite some time now. In a groundbreaking milestone, the Indian defence sector recently scaled new heights, surpassing a significant milestone of Rs 1 trillion in the total value of defence production.

Hindustan Aeronautics was at the forefront, taking on as many orders as it could which resulted in a substantial spike in revenue.

Hindustan Aeronautics has also announced a stock split recently where it will issue shares in the ratio of 1:2. This means a sub-division of one equity share of the company, having a face value of Rs 10 each into two equity shares having a face value of Rs 5 each.

The record date for the same is 29 September 2023.

To know more, check out Hindustan Aeronautics company fact sheet and quarterly results.

Conclusion

Dividends are the lifeblood of many investors. They're can help offset inflation and even provide an income during retirement. These stocks are also considered to be a good buffer for one's portfolio during times of market volatility.

Dividend stocks weren't very popular up to 2021 but lured by the prospect of steady income during a period of high inflation, these stocks have regained their popularity.

Companies paying out a slice of their earnings to shareholders typically have a record of strong profits. This gives an incentive to the company to maintain the dividend payments in the future.

Dividend stocks also have the potential for value appreciation. They can thus bring a dual benefit in the long run. This provides an additional way to beat inflation. Not only does the stock provide income during inflation but the stock price appreciation can also help offset inflation.

If you want to dig deeper into dividend investing, use Equitymaster's powerful stock screener to check high dividend yield stocks and dividend growth stocks in India.

To know what's moving the Indian stock markets today, check out the most recent share market updates here.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...