Whether it's the grocery store, the energy bill, or the fuel bowser — inflation is taking an unwelcome pound of flesh from our bank balances. Instead of accumulating cash, I would buy quality ASX-listed dividend-paying companies to combat this pervasive wealth eater.
Although interest rates are much higher than a year ago, most savings accounts still fall short of the latest monthly consumer price inflation (CPI) figure of 5.6%. That means you and I needed to generate a return of more than 5.6% to prevent our wealth from going backwards in real terms.
Here's how I'd tackle the task of outdoing inflation.
Criteria for ASX dividend shares
The characteristics that inflation-busting companies should exhibit are possibly more important than the companies I'd buy. After all, my specific selections may not be suited to another person's portfolio. But, if you know what to look for, you can find your own opportunities.
First on the list — a demonstrated ability to pass on higher costs to their customers. This is also known as pricing power. If a business can do this, it can safeguard its earnings from the impact of inflation, protecting your returns in the process.
Secondly, low operating expenses. Companies that cost little to operate have less exposure to inflation in the first place. In turn, their bottom lines can waltz on by relatively unscathed.
Lastly, a sturdy balance sheet is an exemplary trait of an inflation-defying ASX dividend share. Ideally debt-free, though not completely necessary. When there's less money being funnelled to cover debt repayments — especially with high interest — more capital is available for funding growth and paying dividends.
A company doesn't need to boast all these attributes simultaneously to be worthwhile. Though, the more, the merrier.
Super Retail Group Ltd (ASX: SUL)
Super Retail Group is the first ASX dividend payer on my inflation-busting list. This 51-year-old retail operator is currently yielding 6.7% before franking credits, exceeding the hurdle rate of 5.6%.
At a price-to-earnings (P/E) ratio of 9.5, investors are arguably lumping it in with other consumer discretionary names in fear of a recessionary hit. However, I think there's a distinction to be made. Be it oil or a car battery, many sales through Supercheap Auto are made on a needs basis.
Moreover, the company has some padding, with over $200 million in cash and zero debt at the end of 2022.
Deterra Royalties Ltd (ASX: DRR)
Next in the deck of inflation-beating cards is mining royalty owner Deterra Royalties. Trumpeting a dividend yield of 7.5%, this ASX company is in the top quartile of dividend payers.
What I like about Deterra is its infinitesimal operational expenses. At $784,000 for the last 12 months, compared to $269 million in revenue, the business has nearly a non-existent exposure to rises in wages and input costs.
However, the drawback is dividends are almost entirely reliant on iron ore prices.
Rural Funds Group (ASX: RFF)
Rural Funds Group has a boatload of debt on its balance sheet and is forking out millions to develop its properties. Neither of which make for a compelling argument to invest in this dividend-paying ASX share.
What is attractive is the group's inflation-hedging properties. This agricultural real estate investment trust (REIT) has shown it can pass on price increases. In its last half-year presentation, Rural Funds recorded a 7% increase in property revenue primarily due to rent increases.
Furthermore, nearly half of the group's leases are linked to inflation to some extent.
At this point in time, this ASX company is offering a yield of 6.2%.
