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With fees based on a percentage per transaction, Visa gets a higher dollar amount when inflation hits everything from food to travel.Jenny Kane/The Associated Press

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It may be time for investors to seek out inflation-proof stocks.

Companies now face a more challenging environment given the rising cost pressures. And North American central banks plan to raise interest rates more aggressively as not only 50, but 75-basis-point rate hikes could be on the table, too.

But some businesses can weather these storms better because they have pricing power – that is, the ability to raise prices without reducing demand for their products. For example, they may sell goods or services that customers can’t do without, have few competitors, or have inflation adjustments in contracts.

We asked three portfolio managers for their top picks among dividend stocks that can power through inflation.

Robert Lauzon, chief investment officer and portfolio manager, Middlefield Capital Corp.

His fund: Middlefield Canadian Dividend Growers Class

The pick: Topaz Energy Corp. TPZ-T

Forward annual dividend and yield: $1.04 (4.6 per cent)

Topaz Energy, which earns revenue from land-royalty interests and energy infrastructure assets in Western Canada, is a unique business with some pricing power, Mr. Lauzon says.

The Calgary-based firm, which was spun out from natural gas producer Tourmaline Oil Corp., will get marginally higher revenue from inflationary adjustments to fees charged by gas processing plants in which it has a working interest, he adds.

Topaz Energy also benefits from rising volumes at its gas plants amid current high commodity prices. On the royalty side, it also has an “interesting spin on pricing power” because it gets revenue from royalties but doesn’t take on the risk of paying for expenses such as drilling or buying fracking equipment, he notes.

It has a 90 per cent margin on most of its businesses. However, a recession is a risk for commodity plays. Topaz, he says, trades at a valuation multiple below peers in the energy royalty and infrastructure space.

The pick: Canadian National Railway Co. CNR-T

Forward annual dividend and yield: $2.93 (1.9 per cent)

Canadian National Railway’s (CN Rail) pricing power stems from barriers to entry into the railroad industry, Mr. Lauzon says.

Montreal-based CN Rail operates in a duopoly with Canadian Pacific Railway Ltd. (CP Rail) in Canada and even a monopoly in some regions, he notes. “In North America, it’s an oligopoly.” That means railways can pass on price increases, including rising fuel costs, to customers who will pay up because rail may be the only, or cheapest way – versus trucks – to get goods to markets.

In the first quarter, higher fuel surcharges and freight rates helped boost CN Rail’s revenue by 5 per cent. Tracy Robinson, who recently became CN’s chief executive officer after executive stints at TC Energy Corp. and CP Rail, “keeps me bullish on the name” because of her strategic priorities, and strong freight demand, he says.

A recession is a risk to the stock. CN trades at almost 20 times forward earnings, which is in the middle of its five-year historical range.

Donny Moss, principal portfolio manager, North American Equities, Industrial Alliance Investment Management Inc.

His fund: Clarington Dividend Growth Class

The pick: Waste Connections Inc. WCN-T

Forward annual dividend and yield: 92 cents (0.7 per cent)

Waste Connections, North America’s third-largest waste management company, is in an industry with a lot of pricing power that holds up even during recessions, Mr. Moss says.

The Vaughan, Ont.-based provider of garbage pick-up and recycling services gets about 50 per cent of its revenue from municipalities with contracts linked to the Consumer Price Index, he adds. Revenue from corporate customers comes from multi-year contracts with price hikes done on renewal.

The company aims to own landfills as well as the collection route, so that means more synergies and better margins, he says. It also has low employee turnover and fewer accidents with its trucks than the industry.

The risk, he says, stems from its shares trading at the higher end of its historical range and at a premium to its peers, Waste Management Inc. and Republic Services Inc. Waste Connection’s profit margins are higher than its competitors’ “so it’s a sign of a quality business.”

The pick: Canadian Pacific Railway Ltd. CP-T

Forward annual dividend an yield: 76 cents (0.8 per cent)

Canadian railways have strong pricing power due to the duopoly nature of the domestic industry, but CP Rail is a more compelling play because of its deal to buy U.S.-based Kansas City Southern, says Mr. Moss, who also holds CN Rail in his fund.

The acquisition still requires regulatory approval, but Calgary-based CP Rail will then have a competitive advantage as the sole railroad with water access on both sides of the continent and a route to Mexico, he adds. Given current supply chain problems, Mexico could benefit from more companies moving production there from Asia.

CP Rail’s pricing power also stems from its ability to get compensated for rising costs, such as those for fuel, he adds.

A recession is a risk because it means fewer goods shipped. CP Rail’s shares trade at a slightly higher valuation than CN Rail but is cheaper when looking out to 2024 and 2025 as earnings increase materially from the Kansas City Southern purchase, he says.

Jeffrey Sayer, vice-president and portfolio manager, Ninepoint Partners LP

His funds: Ninepoint Global Real Estate Fund, Ninepoint Focused Global Dividend Fund

His pick: Prologis Inc. PLD-N

Forward annual dividend and yield: US3.16 (1.8 per cent)

Prologis benefits from the explosive demand for industrial real estate driven by e-commerce and just-in-time inventory management, Mr. Sayer says.

The San Francisco-based warehouse giant controls 1-billion square feet of assets in about 4,700 properties in 19 countries. It has a tremendous pricing power embedded in the business because of leases being renewed at higher, market rents, he says. With the mark-to-market of its current lease book, “you’d see almost a 50 per cent uplift in rent.” About 20 per cent of its leases renew annually. Because market rents are rising in the industrial space, it makes the current book of leases more attractive, he adds.

Slower economic growth is a risk, but Prologis has a buffer from properties still paying below-market rents. Prologis, which has had eight consecutive years of dividend growth, trades at a premium valuation versus some of its peers, but that’s justifiable because of its quality assets, he adds.

His pick: Visa Inc. V-N

Forward annual dividend and yield: US$1.50 (0.7 per cent)

Visa is an electronic payment network whose pricing power stems from the duopoly nature of its business, Mr. Sayer says.

Foster City, Calif.-based Visa and Mastercard Inc. control about 80 per cent of the U.S. market, he says. “We prefer Visa with its larger, 40-per-cent plus market share.” Both own systems that allow digital-payment transactions, while credit-card issuers take the risk. Recently, they slightly raised the card processing fees charged to merchants. Fees, which run from 1.5 to 3.5 per cent depending on the card, have doubled over the past decade, he notes. With fees based on a percentage per transaction, Visa gets a higher dollar amount when inflation hits everything from food to travel, he adds.

A slowing economy is a risk but may be offset by rising prices of goods and services. Visa, which has grown its dividend for 14 consecutive years, trades at a premium valuation but it’s justified because “it has that pricing power,” he says.

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