With oil well above $50 a barrel, Chevron should be able to sustain its dividend.

Kyle Grillot/Bloomberg

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Inflation is proving to be more enduring than passing, leaving investors on the hunt for reliable sources of income.

Bonds are hardly the place to be. Even former bond king Bill Gross this past week called bonds “garbage,” with the yield on the 10-year Treasury hovering around 1.5% and expected to tick higher—and prices lower—when the Federal Reserve begins to taper the $120 billion a month bond-buying program it started early in the pandemic to keep rates down.

High-dividend-paying stocks, however, can serve as bond proxies for yield-hungry investors. Even better that there’s a chance for some stock appreciation, too.

“We’re in the middle of the value trade, and you want to focus on sectors that will benefit: financials, materials, and energy,” Chris Senyek, chief investment strategist at Wolfe Research, tells Barron’s.

Those sectors have a lot of stocks to choose from, and investors will want to be in names that can weather expected economic turbulence in the near term, as the market weighs the effect on inflation of the Fed’s likely tapering and of continued supply-chain disruptions.

Income Investing

Basically, investors are on the hunt for a dividend unicorn: companies that offer higher-than-average yields for their sector and that have a history of increasing that payout. And to avoid getting caught in a value trap, investors will want to look for names that demonstrate the sustainability of their growing dividend by having a lower payout ratio than the sector average and not being overly leveraged.


Chevron

(ticker: CVX) is one stock that meets many of those four criteria, offering a yield of 5% after raising its dividend by 4% earlier this year. The energy giant has a payout ratio—the measure of what percentage of earnings a company pays out in dividends—of 79%. With oil trading around $80 a barrel—well above Chevron’s breakeven point on profitability of around $50 a barrel—the dividend looks even more sustainable.


Citigroup

(C) is a stock that works as a dividend play as well as a comeback story. Shares of the bank currently yield 3%. On an earnings call with analysts on Thursday, Citigroup reiterated its commitment to return capital to shareholders. Some of that capital return will be slanted toward buybacks, as the bank trades at 0.8 times book value. But with the Fed easing restrictions on buybacks and dividends earlier this year, the dividend likely will increase as the bank improves profitability.

“Given where we trade so disappointingly below book, obviously share repurchases make sense for our shareholders,” Citigroup CEO Jane Fraser said in a call with analysts. “We also do have a healthy dividend yield, but that’s an important part of the mix.”

While the cases for Chevron and Citigroup are pretty straightforward, there’s a play in the materials space that looks interesting and meets all four criteria:


Newmont

(NEM).

Naturally, investing in the mining company is a play on gold and one’s conviction that gold is a useful hedge against inflation. Newmont offers a 4% yield after raising its dividend last year in tandem with rising gold prices. With a payout ratio of 63% and a net debt to Ebitda level of 0.2 times, by Wolfe Research’s measure, the dividend looks sustainable with gold hovering around $1,800 an ounce this year.

To be sure, if inflation subsides and gold retreats, it could affect the payout. Newmont has a variable dividend structure, with an annualized base payout of $1 per share set when gold trades at $1,200 an ounce and the rest determined by more recent gold prices, according to a recent investor presentation.

For now, at least, it may be a golden opportunity as inflation has been stronger and longer lasting than many economists have expected.

Write to Carleton English at carleton.english@dowjones.com

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