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What are we looking for?

Stocks that offer some protection against inflation.

Spring brought with it a thaw on frozen consumer prices in Canada and the United States. Inflation readings for May showed prices rising by 2.3 per cent in Canada over the past year, while the U.S. figure registered at 2.1 per cent. The Canadian consumer price index came in above the Bank of Canada's 2-per-cent target for the first time in two years.

Investors may find themselves reconsidering the corrosive effects of inflation on their wealth. Since stocks have a reputation for serving as hedges against inflation, we went looking for candidates that fit the description.

How we did it

Rising prices can erode the value of dividend income, so we wanted to identify companies that have been increasing their dividends consistently.

We first screened for companies with a five-year annual dividend growth rate of at least 20 per cent.

Next, we looked for companies with a history of high profitability in different economic climates. The five-year average return on equity had to be higher than 15 per cent.

Last, companies with pricing power can offset inflation by passing cost increases on to their customers through raising prices.

And since gross margin essentially measures the difference between a company's costs and its prices, margin growth can be considered a measure of pricing power. We set a minimum compounded annual growth rate of gross margins at 5 per cent.

What we found

At the top of the list are three familiar Canadian companies that have been growing their dividends aggressively: Agrium, Constellation Software, and Potash Corp. of Saskatchewan.

If we are at the outset of an inflationary environment, these companies may well be poised to continue to raise their dividends at a rate higher than inflation in the coming months.

But as with all companies on this list, further research is required to determine which among them can remain profitable and reward shareholders if prices should continue to rise.

Companies with consistently rising payouts

CompanyTickerDiv. 5yr avg. gwth (%)5yr avg. ROE (%)Gross Margin 5yr avg. gwthMarket cap ($-Mil)
Agrium Inc.AGU-T87.217.55.514,422.5
Constellation SoftwareCSU-T73.236.26.45,266.7
Potash Corp.of Sask.POT-T57.220.26.334,814.7
CF Industries HoldingsCF-N53.432.210.413,756.2
Brunswick Corp.BC-N51.679.817.14,158.3
Seagate Tech. PLCSTX-Q44.057.031.719,733.4
Celanese Corp.CE-N37.628.96.410,826.0
Westlake ChemicalWLK-N35.425.146.712,146.7
Magna Int'l Inc.MG-T29.516.339.225,346.8
Cummins Inc.CMI-N29.021.96.831,309.8
Broadridge Fin. Sol.BR-N24.627.35.15,295.0
KLA-Tencor Corp.KLAC-Q24.616.712.612,465.7
Ingredion Inc.INGR-N23.416.810.56,217.0
Texas InstrumentsTXN-Q22.418.56.955,568.0
Exco Tech. Ltd.XTC-T22.115.721.0482.7
Lindsay Corp.LNN-N21.119.06.51,210.3
Hess Corp.HES-N20.117.115.033,054.5

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