After a whole decade of excessive stock market returns, the stock market is going through a painful bear market this year, primarily due to the surge of inflation to a 40-year high. Most income-oriented investors have been caught off-guard, as they had got used to an almost negligible inflation rate over the last 15 years. Even worse, inflation was initially characterized by the Fed as transitory but it has proved highly persistent.

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It is thus natural that income-oriented investors are wondering how to protect their income streams from eroding. In this article, we will discuss the prospects of three high-yield stocks, which have exceptional dividend growth records and can continue raising their dividends for decades.

Altria (MO)

Altria is a consumer staples giant. It has the Marlboro brand, which has maintained a market share above 40% in the U.S. for several years in a row. It has also tried to diversify away from its flagship business and thus it has a 10% equity stake in global beer giant Anheuser-Busch InBev (BUD), a 35% stake in e-cigarette producer JUUL and a 45% stake in marijuana company Cronos Group (CRON). Despite its diversification efforts, Altria still generates the vast portion of its sales and earnings from its smokeable tobacco products.

Altria is facing a secular headwind, namely the steadily declining percent of population that smokes. This trend has remained in place for more than three decades. However, thanks to the addictive nature of its products and the inelastic demand for them, the tobacco giant has been able to offset the secular decline with material pricing hikes year after year. As a result, it has managed to grow its earnings per share every single year over the last decade, at an average annual growth rate of 9.4%. The exceptional growth record of Altria is a testament to the strength of its business model.

Altria is currently facing another threat, namely the accelerated shift of consumers from traditional cigarettes to alternative products, such as vaping products. Altria is not a leader in alternative products and thus it acquired a 35% stake in JUUL, a leader in vaping products, for $15.8 billion a few years ago. The timing of the acquisition proved disastrous, as JUUL has incurred a plunge in its sales in recent years due to tight restrictions from regulatory authorities, which try to limit the penetration of vaping products in young adults. Consequently, Altria recently wrote off the vast portion of its investment in JUUL.

The failed investment in JUUL and the threat from alternative products have taken their toll on the stock price of Altria. This has created a great investing opportunity. To be sure, the company has kept growing its earnings per share, with 6% growth expected this year, to a new all-time high.

Moreover, Altria has grown its dividend for 52 consecutive years and is currently offering a nearly 10-year high dividend yield of 8.2%. Furthermore, the stock has a payout ratio of 74%, which is a 10-year low for the tobacco giant. Given also its proven resilience to downturns, Altria is likely to continue raising its dividend for many more years.

V.F. Corporation (VFC)

V.F. Corporation was founded in 1899 and is one of the largest apparel, footwear and accessories companies in the world. Its brands include The North Face, Vans, Timberland and Dickies.

Thanks to the popularity of its premium brands, V.F. Corp has proved resilient to recessions. In the Great Recession, in which most companies saw their earnings collapse, V.F. Corp incurred a benign 7% decrease in its earnings per share.

However, V.F. Corp is currently facing a strong headwind due to the surge of inflation to a 40-year high. Not only does high inflation exert pressure on the margins of the company, but it also leads consumers to reduce their purchases. In addition, inflation exerts pressure on the valuation of V.F. Corp, as it significantly reduces the present value of future cash flows. Overall, excessive inflation has many negative effects on V.F. Corp.

In the second quarter, V.F. Corp grew its sales and organic sales by 3% and 7%, respectively, over the prior year’s quarter but its earnings per share slumped from $0.28 to $0.09 and missed the analysts’ consensus by $0.05, primarily due to high cost inflation and lockdowns in China. Due to the impact of inflation on its margins, V.F. Corp lowered its guidance for its earnings per share in the full year from $3.30-$3.40 to $3.05-$3.15. Even worse, the company recently lowered its guidance even further, to $2.60-$2.70, due to poor consumer trends and high inventories. Due to the perfect storm facing the stock, the latter has plunged 61% this year, to a 10-year low.

On the bright side, thanks to the aggressive policy of the Fed, inflation is likely to begin to subside next year. Therefore, the current headwinds are likely to subside in the upcoming years. Moreover, V.F. Corp has exhibited an exceptional performance record. It has raised its dividend for 49 consecutive years and hence it is a Dividend Aristocrat. It is also offering a 10-year high dividend yield of 7.0%. The stock has an elevated payout ratio of 75% this year due to the aforementioned headwinds but it has a rock-solid balance sheet, which is essentially debt-free. As a result, the company is likely to be able to endure the ongoing downturn without any problem.

Enbridge (ENB)

Enbridge is a midstream oil and gas company, which is headquartered in Canada and operates in four segments: Liquids Pipelines, Gas Transmission, Gas Distribution and Green Power. These segments generate 53%, 29%, 13% and 5%, respectively, of the total earnings of the company.

Enbridge is an immense midstream company. Through its vast pipeline networks, the company transports approximately 25% of North America’s crude oil and 20% of the natural gas consumed in the U.S. It is also the largest distributor of natural gas in the U.S. by annual volumes.

The oil and gas industry is infamous for its cyclicality, which is caused by the dramatic swings of the prices of oil and gas. Enbridge is a bright exception to this rule thanks to its defensive business model. The company has a tollbooth-like, fee-based model and thus charges fees to its customers for the products they transport and store through the pipeline networks of Enbridge. The contracts have minimum-volume requirements and hence Enbridge enjoys resilient cash flows even when its customers transport and store lower volumes than normal.

This business model has proved markedly resilient during recessions. To be sure, in 2020, when most oil companies posted excessive losses due to the collapse of global oil consumption amid the pandemic, Enbridge grew its distributable cash flow (DCF) per unit by 7%, to a new all-time high. The MLP has grown its DCF per unit by 4.8% per year on average over the last decade.

Moreover, Enbridge has raised its distribution (in CAD) for 27 consecutive years, at a 10% average annual rate. It is also offering an above-average distribution yield of 7.0% and has a healthy payout ratio of 65%. Given also its proven resilience to downturns, the MLP is likely to continue raising its distribution for many more years.

Final Thoughts

The above three stocks have exceptional dividend growth records and are offering above-average dividend yields. As they have also proved resilient to many recessions, they are best-of-breed stocks and thus they can provide a safe haven in the ongoing bear market. Nevertheless, they are suitable only for the investors who can ignore short-term pressure on the stock price and remain focused on the long run.

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