These 3 Stocks' Dividend Growth Trounces Inflation

These 3 Stocks' Dividend Growth Trounces Inflation

In a climate of historically low interest rates, yield is hard to come by. A side effect of low interest rates has been the rise in price of everyday necessities, such as food and fuel -- meaning investors are truly stuck between a rock and a hard place. Income is tough to find, as traditional savings products yield almost nothing, but income is exactly what savers need when inflation hits.

Thankfully, investors can buy high-quality dividend stocks that increase their payouts at rates that far exceed inflation. So long as you're willing to endure the ups and downs of the stock market, you can protect the purchasing power of your hard-earned dollars with blue-chip dividend-growers.

Beat inflation with dividends
Historically, inflation has run at about 2% to 3% per year, which doesn't sound like much. But if you're only earning 1% on your investments, your savings are actually eroding in real terms. Prior to the recession, it was easy to earn 1% on even the most conservative products, like certificates of deposit. Now, however, it's an entirely different story: Savers are having a difficult time earning enough yield to keep up with inflation.

That's why owning shares of high-quality dividend stocks is so important. Equity yields are attractive right now, particularly when many stocks have the financial ability to raise their dividends over time. One great example is fast-food giant Yum! Brands , which operates the KFC, Pizza Hut, and Taco Bell chains. Until recently, Yum! paid $1.34 in annualized dividends, amounting to a 1.9% yield. However, the company just announced it had boosted its dividend to $1.48 per share -- a 10% increase that now represents a 2.1% yield.

Yum! has done an excellent job of increasing its dividend at rates far above inflation over the past several years. The recent dividend raise marks the ninth year in a row that Yum! has given investors a double-digit percentage increase. Double-digit raises can really add up over time. Consider that if Yum! continues to grow its payout by 10% per year, it'll be paying $2.38 five years from now. That would mean a 3.3% yield, based on its current stock price.

Two tech giants sharing cash
It may seem surprising, but technology stocks have become a haven of sorts for income investors. Over the past several years, many large tech companies have embraced dividend payouts with open arms, and their investors are likely appreciative. It makes sense, after all: The most prominent tech stocks produce strong cash flows and maintain clean balance sheets, flush with cash and having little in long-term debt to service.

Consider the recent dividend actions of tech giants Microsoft and Texas Instruments . Microsoft boosted its dividend by 22% on Sept. 17, and it now yields an attractive 3.4% at recent prices. As Microsoft's growth leveled off in recent years due to an inability to find new avenues for growth yet an ironclad grip on software that still churns out huge amounts of cash, the company has ratcheted up its dividend. And, to the company's credit, Microsoft has made great strides with its payout. In just the last three years, Microsoft has more than doubled its dividend.

Meanwhile, Texas Instruments has equally embraced dividend payments as a means to enhance shareholder returns. The semiconductor giant has actually increased its dividend twice this year alone. All told, the company has boosted its payout by 43% from its payout this time last year. Texas Instruments now yields 3% and has clearly demonstrated its commitment to protecting its investors' purchasing power.

Protect your portfolio from inflation with dividend growth
Rising costs of living are bad enough for everyday investors. But when you consider the paltry yields available on most fixed-income and savings products nowadays, there's all the more reason to consider buying highly profitable dividend stocks. Earning next to nothing from savings never feels good, especially when you know inflation is eating away at your purchasing power.

As a result, investors with spare cash who desire income from their investments should consider high-quality dividend stocks like Yum! Brands, Microsoft, and Texas Instruments. These stocks are financially strong enough to raise their payouts at rates that far exceed inflation and pay compelling current yields -- and as an added bonus, you stand a good chance of earning capital gains from their successful underlying businesses.

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Bob Ciura has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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