Canadian stocks that grow their dividends are a great hedge against inflation. Just a few days ago, Statistics Canada released its inflation data for March 2022. Annual inflation rose to 6.7% in the month. That is a massive number that flew past many economists’ expectations. Canadians have not seen that level of inflation since the 1990s.
You can’t hedge inflation with cash
Inflation is a challenge to hedge against. If you hold a lot of cash, you are losing long-term buying power, especially if high inflation is sustained. Long-term bonds are a challenging investment today, because their value declines when interest rates rise. Interest rate increases are one of the only tools that can combat inflation.
Dividend-growth stocks are ideal ways to protect your passive income
Fortunately, stocks are a decent inflation hedge. However, some Canadian stocks are better than others. If you are looking to combat inflation, dividend-growth stocks look attractive in this environment. As inflation increases, so too should their dividend rates. It is an attractive value-preservation trick. If you are looking to offset inflation in your investments, here are two under-$20 dividend stocks to own for the near and even long term
Cenovus Energy: A little yield with ample dividend upside
With crude oil consistently trading over US$100, it is a good time to have some exposure to Canadian energy stocks. Global energy supply has dwindled in the past few years, and that is exacerbated by the war in Ukraine. Consequently, it is not unreasonable that oil prices remain persistently elevated for some time. One Canadian dividend stock that should benefit is Cenovus Energy (TSX:CVE)(NYSE:CVE).
Like Suncor, it has an integrated set of operations that include oil sands, offshore, and conventional oil production. It also has a network of refineries and midstream operations. After production costs and operational expenses, Cenovus is generating a significant amount of excess cash. Last year, it produced $4.6 billion of cash. Given the high oil prices in 2022, it could do even better this year.
As Cenovus reaches its debt targets, it will accelerate shareholder returns. At $18.24 per share, it only pays a 0.62% dividend yield today. However, some analysts believe it could pay a dividend many multiples of that level soon. For a hedge against rising oil costs, this is a perfect dividend stock to own right now.
Algonquin Power: A legendary dividend-growth stock
If you are not that interested in volatile oil stocks, you may want to consider a high-quality utility like Algonquin Power and Utilities (TSX:AQN)(NYSE:AQN). It operates a diversified portfolio of regulated utilities and renewable power assets across North America. Algonquin has a particular expertise at acquiring inefficient utility assets (that are often heavy carbon emitters), greening their operations, and growing their rate base.
Right now, it is acquiring a large electric utility in the U.S. that could provide some solid upside in the years ahead. Beyond acquisitions, the company is also investing over $9 billion to expand and improve its portfolio. Management believes this will help fuel 7-9% annual earnings-per-share growth over the next five years.
That earnings growth should translate into a similar rate of dividend growth. At $19.80 per share, Algonquin already pays an attractive 4.36% dividend yield. This Canadian dividend stock has a long history of growing its dividend reliably. For the long term, Algonquin is a defensive stock to own for inflation-beating streams of passive income.
