3 Rich-Retirement Blue-Chips To Buy In Case Inflation Gets Very High

Summary

• Inflation is at 30-year highs, and many investors fear the impact on their nest eggs if high inflation doesn't prove transitory.
• Stocks in general are the best inflation hedge in history, but the market is 29% overvalued and expected to deliver just 31% total returns over the next five years.
• CE is a hyper-growth blue-chip basic materials supplier that has several growth catalysts that are expected to deliver 18.5% CAGR growth and 106% total returns over the next five years.
• Enbridge is my favorite 7% yielding Ultra SWAN utility, and inflation protection in its contracts protects 98% of its cash flow. Analysts expect ENB to deliver about 120% total returns in the next five years.
• Prudential yields a very safe 4.5% and analysts expect 10.5% CAGR long-term growth even if interest rates merely return to 2010s levels.
• This idea was discussed in more depth with members of my private investing community, The Dividend Kings. Learn More »

Nerthuz/iStock via Getty Images

Thanks to the strongest economic growth in nearly 40 years, as well as supply chain disruption and record stimulus, rising inflation is a concern for many investors today.

Using the Fed's favorite inflation metric, core PCE, we're now seeing the highest inflation in 30 years.

Fortunately, long-term inflation expectations remain muted and indicate the bond market isn't concerned about dangerous inflation for the foreseeable future.

The so-called "smart money" on Wall Street, bond investors, are expecting 2.3% inflation for the next 30 years. But the bond market isn't infallible. What if inflation does rise to 3%, 4%, or even 5+% in the next few years and stays there?

Fortunately, stocks in general, including REITs, are the best historical hedge against inflation.

No matter what kind of inflationary environment we've faced since 1988, in the modern era, stocks, and REITs have delivered consistently solid returns.

The same is true since 1950, when interest rates were rising at least 1%, usually due to stronger economic growth.

Even since 1928, as far back as reliable stock price data goes, we see that stocks tend to do well in all inflation environments.

Bonds, naturally, are rate sensitive.

However, even bond corrections tend to be very mild.

A prudently diversified and risk-managed portfolio has nothing to fear from rising inflation.

Consider this. The worst year for bonds in history was 2009 when Treasuries fell 11% due to soaring inflation expectations.

Guess what stocks did as quarterly earnings grew over 100% off 2008's lows? Stocks in 2009 finished up 25%.

A 60/40 portfolio was up 10.6% in 2009, the single worst year for US bonds in history.

Why are stocks the best long-term inflation hedge?

That's because, unlike bonds, stocks are ownership in living and evolving companies, hopefully, managed by trustworthy, competent, and adaptable executives.

When input costs rise, companies raise their prices preserving margins, or even expanding them.

Since 1926 the S&P 500's dividends have grown 2% faster than inflation, preserving the buying power of retirement investors in almost all economic, market, and interest rate environments.

But while stocks, in general, are the best long-term inflation hedge, today I wanted to highlight Enbridge (ENB), Prudential (PRU), and Celanese (CE), as three dividend blue-chips that should do particularly well in case inflation does rise above bond market and economist expectations in the coming years.

Celanese: Hyper-Growth Chemical Blue-Chip That Could Raise Prices With Ease In An Inflationary Environment

Business Description

Celanese is one of the world's largest producers of acetic acid and its downstream derivative chemicals, which are used in various end markets, including coatings and adhesives.

The company also produces specialty polymers used in the automotive, electronics, medical, and consumer end markets as well as cellulose derivatives used in cigarette filters." - Morningstar

CE is poised to benefit from a booming economy in general, infrastructure spending, and has nice inflation heading power as well.

Oh and CE also has one other mega-trend to drive its impressive hyper-growth consensus forecast of 18.5% CAGR.

(Source: FactSet Research Terminal)

Longer-term, Celanese should benefit from the increase in electric vehicles, as it sells up to 4 times more content per EV than for vehicles with internal combustion engines.

As EVs grow to 30% of new auto sales by 2030, profits in this segment are well-positioned to increase." - Morningstar (emphasis added)

Safety score: 81% — 5/5 — very safe

Dependability score: 70% — 3/4 — very dependable

Quality score: 75% — 11/12 Super SWAN

Long-Term Risk Management Consensus: 50th industry percentile - average

2021 average fair value: $165.25

2022 average fair value: $165.84

12-month blended forward harmonic average fair value: $165.59

Margin of safety: 6%

DK rating: potential reasonable buy

Yield: 1.7%

Long-term growth consensus: 18.5%

Long-term consensus total return potential: 20.2% (vs. 7.8% for the S&P 500 and 11.0% aristocrats)

Consensus Total Return Potential

For context, here's the return potential of the 29% overvalued S&P 500.

S&P 500 2023 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

S&P 500 2026 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

And here's what investors buying CE today can reasonably expect.

• 5-year consensus return potential range: 6% to 18% CAGR

CE 2023 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

CE 2026 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

CE Investment Decision Score

Ticker	CE	DK Quality Rating	11	75%	Investment Grade	B-
Sector	Basic Materials	Safety	5	81%	Investment Score	81%
Industry	Chemicals	Dependability	3	70%	5-Year Dividend Return	12.80%
Sub-Industry	Specialty Chemicals	Business Model	3		Today's 5+ Year Risk-Adjusted Expected Return	9.50%
Super SWAN, Phoenix, Hyper-Growth
Goal	Scores	Scale	Interpretation
Valuation	3	Reasonable Buy	CE's 05.93% discount to fair value earns it a 3-of-4 score for valuation timeliness
Preservation of Capital	5	Average	CE's credit rating of BBB- implies an 11% chance of bankruptcy risk, and earns it a 5-of-7 score for Preservation of Capital
Return of Capital	7	Good	CE's 12.80% vs. the S&P's 9.34% 5-year potential for return via dividends earns it a 7-of-10 Return of Capital score
Return on Capital	10	Exceptional	CE's 9.50% vs. the S&P's 3.49% 5-year risk-adjusted expected return (RAER) earns it a 10-of-10 Return on Capital score
Total Score	25	Max score of 31			S&P's Score
Investment Score	81%	Well Above Market Average			73/100 = C(Market Average)
Investment Letter Grade	B-

Click to enlarge

(Source: Dividend Kings Automated Investment Decision Score)

CE isn't a screaming bargain, merely a fast-growing, inflation-resistant, wonderful company at a fair price.

Which makes it far more reasonable and prudent to buy than the 29% overvalued S&P 500.

Enbridge: Inflation Protection Built Into Its Long-Term Contracts And Regulated Business

Further Research Including Comprehensive Risk Analysis

• Daily Blue-Chip Deal Video: Enbridge, A 7.2% Yielding Ultra SWAN Global Aristocrat Retirees Can Trust

This is an exclusive comprehensive deep-dive analysis of ENB's safety, dependability, quality, valuation, and short, medium, and long-term return potential.

This video article provides a comprehensive analysis of the risk profile, courtesy of 33 experts that have studied this business for decades and know it better than anyone other than management.

(Source: ENB investor presentation)

Enbridge is the most utility-like midstream with 98% of cash flow under long-term contracts or regulated. Inflation adjustments are built into those contracts, some of which are for 25+ years.

(Source: ENB investor presentation)

Utilities tend to be relatively inflation-resistant, and ENB is the largest gas utility in Ontario.

Safety score: 86% — 5/5 — very safe

Dependability score: 86% — 4/4 — exceptional dependability

Quality score: 84% — 12/12 Ultra SWAN

Long-Term Risk Management Consensus: 88th industry percentile - very good

2021 average fair value: $45.43

2022 average fair value: $49.2

12-month blended forward harmonic average fair value: $47.61

Margin of safety: 17%

DK rating: potential strong buy

Yield: 7.0%

Long-term growth consensus: 6.3% (management guidance 5% to 7%)

Long-term consensus total return potential: 13.3% (vs. 7.8% for the S&P 500 and 11.0% aristocrats)

Management long-term guidance: 12.3% to 14.3% CAGR

ENB 2023 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

ENB 2026 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

ENB Investment Decision Score

Ticker	ENB	DK Quality Rating	12	84%	Investment Grade	A
Sector	Energy	Safety	5	86%	Investment Score	97%
Industry	Oil, Gas & Consumable Fuels	Dependability	4	86%	5-Year Dividend Return	42.80%
Sub-Industry	Oil & Gas Storage & Transportation	Business Model	3		Today's 5+ Year Risk-Adjusted Expected Return	11.17%
Ultra SWAN, Phoenix, Top Buy, Safe Midstream, Strong ESG
Goal	Scores	Scale	Interpretation
Valuation	4	Strong Buy	ENB's 17.34% discount to fair value earns it a 4-of-4 score for valuation timeliness
Preservation of Capital	6	Above Average	ENB's credit rating of BBB+ implies a 5% chance of bankruptcy risk and earns it a 6-of-7 score for Preservation of Capital
Return of Capital	10	Exceptional	ENB's 42.80% vs. the S&P's 9.34% 5-year potential for return via dividends earns it a 10-of-10 Return of Capital score
Return on Capital	10	Exceptional	ENB's 11.17% vs. the S&P's 3.49% 5-year risk-adjusted expected return (RAER) earns it a 10-of-10 Return on Capital score
Total Score	30	Max score of 31			S&P's Score
Investment Score	97%	Excellent			73/100 = C(Market Average)
Investment Letter Grade	A

Click to enlarge

(Source: Dividend Kings Automated Investment Decision Score)

ENB is my favorite utility to buy today, which is why I've not only invested $60,000 into ENB so far but continue to use ENB to pay for growth with yield.

• combine low/no yielding growth blue-chips with ENB to create synthetic companies with 3.5% to 4% yield and 11+% CAGR consensus growth forecasts
• long-term consensus total return potential of 14.5%+ CAGR while offering very safe, attractive, and exponentially growing income that outpaces inflation each year

Prudential: Would Directly Benefit From A Steeping Yield Curve In Case Inflation Gets Too Hot

Further Research Including Comprehensive Risk Analysis

• Daily Blue-Chip Deal Video: Why I've Invested $11K Into Prudential

This is an exclusive comprehensive deep-dive analysis of PRU's safety, dependability, quality, valuation, and short, medium, and long-term return potential.

This video article provides a comprehensive analysis of the risk profile, courtesy of 24 experts that have studied this business for decades and know it better than anyone other than management.

(Source: FactSet Research Terminal)

My investment thesis on Prudential was always around buying one of the best high-yield insurance blue-chips at attractive valuations.

Do you know the average 10-year Treasury yield in the 2010s? 2.4%.

Do you know what the 2020's average consensus range is? 2% to 3%.

Do you know what analysts expect the 10-year yield to be in 2023? 2.5%.

(Source: CNBC)

Basically, the blue-chip economist consensus is that long-term rates will double in the next 18 months, driven by the best economic growth in nearly 40 years.

Moody's estimates that if the infrastructure bills pass, that will boost US GDP growth by about 1% annually for the next 10 years.

That's also a possible tailwind for interest rates and thus a potential earnings growth catalyst for all financials.

Prudential Consensus Dividend Forecast

Year	Dividend Consensus	EPS/Share Consensus	Payout Ratio	Retained Earnings	Buyback Potential	Debt Repayment Potential
2021	$4.60	$12.90	35.7%	$3,270.20	8.24%	55.8%
2022	$4.87	$13.00	37.5%	$3,203.22	8.07%	59.5%
2023	$5.33	$13.58	39.2%	$3,250.50	8.19%	60.3%
Total 2021 Through 2023	$14.80	$39.48	37.5%	$9,723.92	24.49%	166.05%

Click to enlarge

(Source: FactSet Research Terminal)

Now add in Prudential's ability to drive up to 8% EPS growth through buybacks alone, and you can see why analysts have become very bullish on Prudential's growth outlook.

(Source: FactSet Research Terminal)

Analysts expect 10.5% CAGR long-term growth, much of it driven by aggressive buybacks.

4.5% yield and double-digit consensus growth potential? That's a mighty attractive proposition.

Even if PRU only grows at 8%, a level of growth that could be driven entirely via buybacks, that's still 12.5% CAGR long-term total return potential, a level that's still better than the aristocrats and smashes the consensus forecasts for the 1.4% yielding S&P 500.

Safety score: 88% — 5/5 — very safe

Dependability score: 75% — 3/4 — very dependable

Quality score: 79% — 10/12 SWAN

Long-Term Risk Management Consensus: 72nd industry percentile - good

2021 average fair value: $130.6

2022 average fair value: $131.98

12-month blended forward harmonic average fair value: $131.39

Margin of safety: 22%

DK rating: potential good buy

Yield: 4.5%

Long-term growth consensus: 10.5%

Long-term consensus total return potential: 15.0% (vs. 7.8% for the S&P 500 and 11.0% aristocrats)

PRU 2023 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

PRU 2026 Consensus Total Return Potential

(Source: FAST Graphs, FactSet Research)

If inflation comes in hotter than expected for several years, then PRU could potentially deliver even better returns than the 96% analyst currently expect.

For context, Cathie Wood at ARKK and private equity strive for 15% CAGR total returns over time.

• double your money every 5 years

ARK Innovation ETF Valuation: 124x Earnings 5.0 PEG

(Source: Morningstar)

What do you think is a higher probability/lower risk proposition? Paying less than 9x earnings for Prudential? Or paying 124x earnings for ARKK's portfolio?

PRU Investment Decision Score

Ticker	PRU	DK Quality Rating	10	79%	Investment Grade	A+
Sector	Finance	Safety	5	88%	Investment Score	100%
Industry	Insurance	Dependability	3	75%	5-Year Dividend Return	30.55%
Sub-Industry	Life & Health Insurance	Business Model	2		Today's 5+ Year Risk-Adjusted Expected Return	9.85%
SWAN, Phoenix, Top Buy, Strong ESG
Goal	Scores	Scale	Interpretation
Valuation	4	Good Buy	PRU's 21.75% discount to fair value earns it a 4-of-4 score for valuation timeliness
Preservation of Capital	7	Excellent	PRU's credit rating of A implies a 0.66% chance of bankruptcy risk, and earns it a 7-of-7 score for Preservation of Capital
Return of Capital	10	Exceptional	PRU's 30.55% vs. the S&P's 9.29% 5-year potential for return via dividends earns it a 10-of-10 Return of Capital score
Return on Capital	10	Exceptional	PRU's 9.85% vs. the S&P's 3.41% 5-year risk-adjusted expected return (RAER) earns it a 10-of-10 Return on Capital score
Total Score	31	Max score of 31			S&P's Score
Investment Score	100%	Exceptional			73/100 = C(Market Average)
Investment Letter Grade	A+

Click to enlarge

(Source: Dividend Kings Automated Investment Decision Score)

Prudential is as close to a perfect high-yield blue-chip investment as exists in today's overvalued market.

And if inflation takes off, it's likely to prove even more profitable.

These Are 3 Dividend Blue-Chips To Buy In Case Inflation Gets Very High

Inflation isn't expected to be a problem in 2022 or beyond. That creates a potentially lucrative environment of strong growth, modest inflation and interest rates, and strong stock returns for undervalued blue-chips.

But if inflation does prove to be stubbornly high and persistent, then Celanese, Enbridge, and Prudential are likely to do very well as inflation hedges.

Mind you, stocks, in general, are the best inflation hedge in history, simply because of their proven ability to pass on costs to customers and grow dividends faster than inflation.

But with the market 29% overvalued and offering muted return potential for many years to come, the prudent long-term income investor has the potential to not only enjoy generous, safe, and growing dividends, but also market and aristocrat beating returns as well.

If you're tired of praying for luck on Wall Street and losing sleep over concerns about interest rates, inflation, or short-term earnings, it's time to try disciplined financial science.

If you focus on safety and quality first, and prudent valuation and sound risk management always, then you never have to pray for luck on Wall Street, you'll make your own.

Not only during the good economic times, but in all economic, market, and inflationary environments.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of ENB, PRU either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

DK owns ENB, and PRU in our portfolios.

Comments

[RMUinFL]

@Dividend Sensei
I appreciate the amount of research you did on the effects of inflation on various types of investments. Great info. Thanks.
@Mick research, thanks for the laugh about the attention span of analysts being akin to that of a goldfish. Very nice!

[Veritas1010]

$ENB for me.

Biggest position.

Thank you for your continued examination.

[scottiebumich]

May I ask why you chose Enbridge over Enterprise Products? Assuming you pay 5% state taxes and adding to the 15% Canadian withholding tax you're looking at a real yield of ~5.4% vs 8.1% for Enterprise Products (MLP). That is a 50% higher yields for Enterprise, which has more diversification and a better balance sheet/less leverage? What's your thoughts?

Thanks, Prudential isn't bad, but I wouldn't want to hold a slow growing company that is fairly valued now. A market correction would likely take all stocks down and PRU prudential doesn't have a large enough margin of safety to justify paying full price. Something like FACEBOOK, for example, that is trading near fair value, is a better bet as even in a stock market correction it would only take 1-2 year of earnings growth to move it north again. Prudential could remain as P/E near 6-8 for years.

[Dividend Sensei]

@scottiebumich You get the tax credit that neutralizes the tax withholding for the vast majority of investors.

EPD is another great choice, but I'm limited by time in how many companies each company can cover.

ENB also has a 3.3% faster growth consensus meaning that its long-term consensus total return potential is higher.

I own both, though a lot more ENB.

MMP is my 2nd biggest holding because I've been buying it since October 2020 when it was upgraded back to blue-chip quality (actually Super SWAN quality, a higher caliber of blue-chip) and became eligible for buying.

I personally don't buy anything that's not blue-chip quality.

The only exceptions are OGN and VTRS, which analysts expect to eventually become blue-chip quality and I received via MRK and PFE spin-offs.

If you only buy blue-chips, then even if the fundamentals take a hit (like with SPG) then you're still left owning an average quality company.

If you buy average quality to start and the fundamental deteriorate you might find yourself owning one of the next bankrupt companies headed to zero.

[Dividend Ambassador]

I certainly agree on PRU. I hope we are both right as I now a lot of PRU shares.

[Mick Research]

About CE, another author reached a different conclusion

seekingalpha.com/...

"

Analyst accuracy isn't something you can rely on that fully here, with around 25% failure to forecast results with a 10% margin of error. Even if the company improves here, it doesn't change that there's some uncertainty to forecasts here.

...

Celanese is a typical example of a company where analysts have the attention span of a goldfish. Targets vary with time, climbing nearly 70-80% in less than a year only because the pandemic and the very momentary impact (in the long term) such an occurrence has had.

...
Therefore, I wouldn't pay more than a 12.5X P/E, which comes to around $140/share, and here I'm being extremely optimistic."

The current price is ~$153.

[Dividend Sensei]

@Mick Research

Yes, growth outlooks change as the fundamentals in the industry and economy change.

For cyclical industries, they can change a lot.

That's why we use not only historical margin-of-error-adjusted consensus ranges, but we also adjust those ranges based on historical growth rates and the secular trends the company is facing now.

To paraphrase Churchill, "investing based on the expert consensus opinion is the worst possible strategy. Except for all the others."

In the case of CE, the historical fair value PE is 11.5 to 12.5.

So if you pay 12.5X or less, then you're likely to do well over time, unless the wheels completely fall off the company.

[allenhe]

@Mick Research People emphasize PE too much. It's a useless metric for cyclicals. Relax and BUY CE for the long run...

[BM Cashflow Detective]

"The natural tendency of the state is inflation. This statement will shock those accustomed to viewing the state as a committee of the whole nation ardently dispensing the general welfare, but I think it nonetheless true."
- Murray Rothbard

"The natural tendency of the value investor is to be successful in wealth-building regardless of inflation. This statement will shock those accustomed to viewing the stock market as a bear market crushing machine that is busily destroying the invested wealth of most investors, but I think it nonetheless true."
- BM Cashflow Detective

That's why I made some smart money purchases some time ago in $CE and $PRU.

The whole stock market basically just depends on,

whether there are more stocks out there than idiots

or more idiots than stocks.

After that, it's high time not to be an idiot anymore.

[femur]

Enjoyed the article Dividend Sensei
Long PRU

[Income4ever aka Cyclenut]

Good read,

Add EPD to the short list

[tcraftjim]

Own PRU and ENB and love your analysis on both.

[alessandro.agnoletti74]

Hi Dividend Sensei, what do you think about Unum? At these prices looks dirty cheap. Am i missing anything?

[Dividend Sensei]

@alessandro.agnoletti74

UNM is a lower quality insurance company than PRU or MFC, which is why I haven't been buying it in the pandemic.

PRU is a 10/12 SWAN, MFC also a 10/12 SWAN.

UNM is an 8/12 above-average quality insurance company.

The growth consensus is 5.8%, which means buying today you can expect about 10.5% CAGR long-term returns after valuation changes cancel out over decades.

That's assuming it grows as expected.

If you bought it back in 2020 when the yield was over 7%, you're fine holding it and earning 13+% CAGR over time.

Even if it turns out that all these insurance companies grow slower than expected (say because yields stay permanently lower than over the last decade) buybacks can likely ensure that we all make at least high single-digit returns.

[tomalaska54]

Very well written with solid research.