5 High-Yield Dividend Stocks to Protect Your Retirement From Inflation

There are few things more disruptive to an economy than rising inflation and unemployment. Just ask Argentina, which has defaulted on its debt nine times and has spent the last 100 years combating average annual inflation of 105%. Unemployment continues to plague GDP growth in Greece and Spain. Despite being right around a 10-year low, unemployment is above 15% in both countries.

In the U.S., unemployment defined the Great Depression. Throughout the 1970s, U.S. inflation was above 4% and ended the decade at a staggering 13%. Over the last 30 years, inflation has been an afterthought, rarely rising above 3%. The post-pandemic economy could change that.

Cooped up at home and lacking spending outlets, Americans saved a ton of money last year. The U.S. personal savings rate peaked in April 2020 at 32%, meaning Americans were saving nearly a third of their income. Today, it’s around 13%, still well above the usual 5% to 10% range. Stimulus checks paired with pent-up demand are causing prices to rise. And with rising prices comes inflation, which has gone from 0% to 2.6% in just one year. While U.S. inflation is unlikely to get to Argentina levels, it does devalue savings, which impacts folks in retirement. Here are some strategies retirees can use to protect their wealth from inflation.

Image source: Getty Images.

The 4% dividend yield basket

Dividend stocks provide income no matter what the market is doing — which gives retirees stable inflows. However, because the stock market is at an all-time high, dividend yields have gone down. In fact, the average stock in the S&P 500 yields just 1.3%, the lowest level in 10 years.

US Inflation Rate data by YCharts

One solution to combat the market’s lower yield is to create a diverse basket of stocks from different sectors with a high average yield. An example would be equal parts of consumer staple giant Clorox (NYSE: CLX), pipeline kingpin Kinder Morgan (NYSE: KMI), aerospace and defense contractor Lockheed Martin (NYSE: LMT), telecom titan AT&T (NYSE: T), and the largest semiconductor manufacturer in the world, Taiwan Semiconductor Manufacturing (NYSE: TSM). This basket would give investors a dividend yield of 4%. Not only does this yield outpace inflation, but it also exposes investors to the power of the S&P 500, which has generated a 13.9% return over the last 10 years.

Although completely different companies, these five businesses all share the common traits of high-quality dividend stocks — their free cash flow (FCF) exceeds their dividend payments. This is a crucial characteristic because it means the dividend can be supported with cash from the business instead of debt.

CLX Free Cash Flow (Annual) data by YCharts

Clorox is a recession-proof stock that generates gobs of FCF throughout good times and bad, not to mention it has raised its dividend for over 40 consecutive years. Kinder Morgan generates over 90% of its revenue from long-term contracts, which makes its cash flow fairly predictable. Lockheed Martin’s biggest client is the U.S. government, and it has a track record of paying in full. AT&T’s stable business paired with growth drivers like 5G and HBO Max makes it an ideal income stock. And finally, Taiwan Semi is the global leader in chip manufacturing, a position it could hold for decades to come. In sum, these are five quality businesses with the means to support their dividends and protect retirees from inflation.

Inflation-proofing your retirement means going beyond picking the right investments

Investing in high-yield dividend stocks is one way to beat inflation, but with mounting concerns about rapidly rising prices and the government showing no signs of slowing spending, you may want to implement multiple strategies to fight the potentially damaging effects.

Other techniques to help inflation-proof your retirement should likely include:

  • Optimizing your Social Security benefits

Social Security benefits come with periodic cost-of-living adjustments.

While these raises are an imperfect measure of the inflation retirees actually experience, they’re one of the few sources of retirement income guaranteed to increase when the consumer price index shows rising prices. As a result, it is advisable to come up with a strategy for claiming your benefits that’s likely to provide the most Social Security income possible.

For most retirees, this means choosing to claim Social Security at 70. Doing so entitles you to earn delayed retirement credits that raise the size of your monthly check. A larger benefit also comes with higher cost-of-living increases since your periodic raises are calculated as a percentage of your starting benefit.

  • Maintaining the right asset mix

Investing too conservatively can make it much more difficult to ensure investments protect against rising inflation.

Unfortunately, far too many retirees shift too much of their portfolio to bonds and higher inflation reduces the real return bonds provide. If interest rates go up along with inflation, this can also send bond prices tumbling, further diminishing the returns this investment offers.

While retirees need to ensure they aren’t over-invested in stocks, a portfolio that’s too conservative can also be damaging to your financial prospects, especially when inflation is rapidly increasing. You should make sure you’re exposed to an appropriate level of risk by subtracting your age from 110 and investing that percentage of your portfolio in the market.

  • Responding to rising prices

Finally, you’ll need to respond to rising prices by adjusting your lifestyle to make sure you aren’t spending your retirement nest egg too quickly. Living on a budget can help.

If you see food costs are rising, for example, consider making cutbacks elsewhere so you don’t end up having to withdraw too much from your retirement funds and risk draining your accounts while you’re still reliant upon them.

The $16,728 Social Security bonus most retirees completely overlook

If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $16,728 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.

Christy Bieber has no position in any of the stocks mentioned. Daniel Foelber owns shares of Kinder Morgan and Taiwan Semiconductor Manufacturing and has the following options: long January 2022 $345.0 calls on Lockheed Martin, long January 2023 $345.0 calls on Lockheed Martin, short January 2022 $15.0 calls on Kinder Morgan, short January 2022 $350.0 calls on Lockheed Martin, and short January 2023 $350.0 calls on Lockheed Martin. The Motley Fool owns shares of and recommends Kinder Morgan and Taiwan Semiconductor Manufacturing. The Motley Fool recommends Lockheed Martin. The Motley Fool has a disclosure policy.