AT&T (T) - Get Report shed more than $30 billion in market value last week after it buried plans for a dividend cut deep within the details of its $43 billion media merger with Discovery (DISCA) - Get Report, underscoring the value investors continue to place on income generation as focus shifts from growth to value amid the waning months of the coronavirus pandemic.
Investors punished AT&T's decision to "re-size" its $2.08 per share dividend as it moves to exit its 2018 foray into media content and focus on wireless and 5G growth, while leaving other company bosses nervous about making any adjustments to annual payouts when inflation is running at its hottest pace since 2009 and the economy is set for a grand re-opening following more than year of coronavirus restrictions.
Inflation is often referred to as "the enemy of bonds" but it is equally brutal on growth and tech stocks, many of which promise cash flows further into the future. Inflation erodes the value of those future cash flows, as it does with future bond coupons, and by extension elevates the value of near-term payments such as dividends and buybacks.
In fact, inflation has taken its toll on earnings, as well, with data from Bloomberg showing the weakest inflation-adjusted earnings prospects in at least four decades for the S&P 500, even as collective profits rise 52% from last year to around $411 billion.
All of this has accelerated the shift towards dividend-paying stocks, with the Pro Shares S&P 500 Dividend Aristocrats ETF up 16% so far this year, compared to an 11.7% gain for the broader S&P 500 benchmark, as the economy moves towards a full pandemic exit amid the fastest GDP growth in at least thirty years.
CDC data indicates that more than 131 million Americans are now fully vaccinated, and President Joe Biden's aim of having more than half the population protected by July 4 looks well on track, according to Dr. Anthony Fauci.
That's teeing-up the second leg of the so-called "reopening" trade, during which investors will extend the shift of focus from stay-at-home stocks such as tech companies and big box retailers into a broader exposure of stocks that will benefit from the return to normal life in the world's biggest economy.
Watch RealMoney columnists Stephen “Sarge” Guilfoyle, Chris Versace and Ed Ponsi discuss their exclusive reopening stocks portfolios on May 26 in a special Real Money webinar, Real Talk. Sign up now!
Alongside that, many of the market's top performers so far this year, including Exxon Mobil (XOM) - Get Report (+43.3%), Chevron (CVX) - Get Report (+24.4%), OneOK (OKE) - Get Report (+40.1%), Lumen Technologies (+47.3%) and Williams Companies (WMB) - Get Report (+31.8%) are all at the top of the list of stocks with the highest dividend yields, ranging from 5.08% for Chevron to 6.97% for Lumen.
Dividends are also a sign of management's confidence in its business strategy, based on its willingness to set aside hard-earned cash for shareholder payouts while having enough left in the tank to fund growth, cover expenses and pay back debt.
Bank of America's closely-watched survey of global fund mangers, who collectively control more than half a trillion dollars in assets, noted this month that while "value" remains the most consensus factor that determines market performance, "high quality" and "high dividend" were cited as key determinants in a low-yield environment.
Nearly 70% of those polled, in fact, see above-trend growth and inflation over the near-term, resulting in the lowest levels of tech stock exposure in nearly three years.
So where can investors look for dividend protection, alongside business growth and a natural inflation hedge?
TheStreet's founder, Jim Cramer, says the mix of stocks providing these characteristics is eclectic, but guided readers towards companies that have "pricing power and are beneficiaries of a weaker dollar, that transport goods that can charge a premium, that drill and move oil and retailers that sell goods for the home and for going to work."
Cramer likes financials, as well, given that the current inflation spike we're seeing is driven by technical factors such as tariffs, semiconductor shortages, rising labor costs and supply-chain bottlenecks.
And with the Federal Reserve removing restrictions on payouts and buybacks next month, Cramer says it's worth considering banks such as JPMorgan (JPM) - Get Report, Bank of America (BAC) - Get Report and Goldman Sachs (GS) - Get Report as "hedged inflation plays."
"Think about it: the banks are all digitizing and have too many employees. They are trying to shrink their footprint. They don’t buy or need any semiconductors," Cramer said. "[But] If inflation turns out not to be transitory but entrenched then Fed Chief Jay Powell will have to raise short-term rates, which is fabulous for the banks."
Glenmede's Jason Pride and Michael Reynolds agree with Cramer on the likely "transitory" nature of inflation, which the Fed sees slowing notably into the end of the year, but they concede there is a "distinct possibility that prices could prove volatile as the U.S. economy normalizes."
"In environments where inflation has surprised to the upside relative to market-based expectations, investments such as commodities, gold and resource-producing equities have historically performed best," the pair said in a recent client note. "As a result, investors interested in hedging their portfolios against further inflation risk would do so most effectively via real assets."
Caterpillar (CAT) - Get Report (dividend yield of 1.72%) Cramer notes, as well as Nucor (NUE) - Get Report (dividend yield of 1.57%) are attractive options in the resource and mining space that offer inflation hedges with dividend protection.