3 Dividend Stocks To Beat Inflation And Earn Growing Dividends

Broad markets may have posted a relief rally yesterday after the FOMC meeting minutes showed that policymakers are considering the possibility of pausing the Fed's rate-hike cycle later this year. But while the outlook soothed investor nerves in the near term, there are still plenty of macroeconomic headwinds on the horizon, such as high inflation and growing US recession risks.

In such challenging times, building a quality, income-generating portfolio can significantly improve the performance of anyone's investments. This can be done by buying shares of companies with solid balance sheets, a wide economic moat, and a history of rewarding investors through growing dividend payouts.

Such companies usually offer products and services so essential to consumers that one can't imagine everyday life without them. Furthermore, this makes these businesses resilient through market meltdowns, wars, depressions, geopolitical upheaval, and asset bubbles.

Keeping this theme in mind, below, we've short-listed three stocks that income investors could consider buying now, especially when inflation is running high. Each stock not only offers the potential for solid capital gains but also has provided substantial payout raises each year to counter the impact of higher prices.

1. Bank Of Nova Scotia

• Dividend Yield: 4.91%
• Quarterly Payout: $0.78
• Market Cap: $76.6 billion

The Bank of Nova Scotia (NYSE:BNS), Canada's third-largest lender, is currently offering one of the highest yields among the country's top six banks. It could be an excellent addition to any long-term income portfolio. Shares of BNS (TSX:BNS) closed Wednesday at $65.36.

BNS Weekly Chart

The Toronto-based financial institution has the most diversified portfolio among Canadian banks, with a substantial part of its income coming from overseas operations, mainly in Central America and the Caribbean.

Chief Executive Officer Brian Porter has spent much of his eight-year tenure revamping the international unit by selling off small or underperforming operations and doubling down in larger, more promising markets.

Yesterday, the bank reported that its Canadian banking earnings grew by 27% year-over-year, fueled by robust mortgage and commercial loan growth, lower credit loss provisions, and substantial revenue from fees.

The lender also has an excellent dividend track record. Growth in the bank's earnings has resulted in dividend increases in 43 of the last 45 years—one of the most consistent records for dividend growth among major Canadian corporations. The bank has been paying dividends since 1833.

2. Home Depot

• Dividend Yield: 2.64%
• Quarterly Payout: $1.9
• Market Cap: $76.6 billion

Home Depot (NYSE:HD) is one of those retailers you can rely on to provide consistent dividend payments. The home-improvement giant, in recent years, invested heavily to prepare itself for the e-commerce onslaught and changing consumer behavior. Its stock closed Wednesday at $293.57 a share.

HD Weekly Chart

As well, HD recently boosted its annual earnings outlook after a jump in first-quarter same-store sales showed that demand for home-improvement supplies is persisting, even as mortgage rates rise.

In the earnings call with analysts, Chief Financial Officer Richard McPhail said appreciating home values have helped drive consumer spending despite inflation.

The Atlanta-based HD is also a reliable dividend payer. Over the past five years, its quarterly dividend, on average, has expanded 22% per year. With an annual dividend yield of about 2.6%, the company pays $1.9 a quarter. And, with a solid payout ratio of 50%, there's much more room to grow.

3. McDonald's

• Dividend Yield: 2.26%
• Quarterly Payout: $1.38
• Market Cap: $279 billion

Fast food restaurant giant McDonald’s (NYSE:MCD) has a solid track record of consistently rewarding investors. Since it first started paying dividends in 1976, the company has raised its payout every year. MCD closed yesterday at $244.01.

MCD Weekly Chart

McDonald's has many qualities that investors look for in a top income stock: the company has a global competitive advantage over rivals, a solid recurring revenue model, and a great history of compensating its investors.

After struggling through the pandemic, when lockdowns hurt its restaurant business, the company rapidly regained its sales momentum. In April, the company reported better-than-expected earnings and revenue, fueled by price hikes in the US and strong international sales growth.

MCD pays a quarterly dividend of $1.38 per share. That translates to an annual dividend yield of 2.26% at the current stock price. With a manageable payout ratio of about 70%, the company is in a solid position to continue delivering dividend growth.

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