3 Stocks for Beating Inflation
These stocks offer handsome yields and protection against rising prices.
By Jack Hough

Treasury inflation-protected securities offer meager interest: 0.9% on 10-year issues, versus 3.2% on standard bonds of the same duration. The tradeoff, of course, is that the principal is adjusted for the rate of inflation, keeping investors current with the cost of living, right?

Maybe not. The inflation measure underpinning TIPS has shown a 3.2% price increase over the past year. That's the biggest increase since October 2008, and it's higher than the 2.4% average for rolling 12-month periods since 2000. But gasoline now costs U.S. drivers 38% more than a year ago, according to the Department of Energy. Employer health care costs are poised to rise 8.5% next year, according to a recent report by PricewaterhouseCoopers. Butter--humble butter--is up 23% in a year. Who's to tell a long-distance-driving, health-plan-sponsoring, butter-loving business owner that his costs have climbed only 3.2% in a year?

Cynics have long argued that government inflation statistics are rigged to understate cost increases. I find little evidence for that claim. But no inflation measure can track the cost of living for everyone using the same basket of goods and services. A family putting two kids through public college, the cost of which has increased at more than three times the rate of inflation over the past decade, probably won't care that bananas have gotten cheaper over the past three years. A childless vegan might.

Here's an alternative for investors seeking inflation protection: shares of companies whose goods and services we spend plenty on. Soaring prescription costs will be a little easier to swallow is shares of your drug maker are rising, too. Pumping gas might feel like less of a loss if your oil driller's stock is pumping out quarterly payments. Below are three candidates with dividend yields over 3%, or more than triple the yield on those 10-year TIPS. And whereas TIPS coupons are locked in for the life of the bonds, dividends for these companies have grown in recent years.

ConocoPhillips
Dividend yield: 3.7%
ConocoPhillips (COP) shares have climbed 58% in two years, besting shares of rivals like Exxon Mobil (MOB) and those of large U.S. companies in general. Oil's price increase explains only part of the company's recent prosperity. Management is about halfway through a restructuring program that involves selling low-margin refining capacity, reducing debt, returning cash to shareholders and increasing returns. Last year the company spent more on share repurchases than on dividends, meaning the stock's 3.7% dividend yield was really a 7%-plus net payout yield. This year analysts expect ConocoPhillips to spend nearly $11 billion on share repurchases, versus about $3.6 billion on dividends.

Johnson & Johnson
Dividend Yield: 3.4%
Shares of Johnson & Johnson (JNJ) have been battered by manufacturing problems leading to recalls for a long list of products, including Tylenol, Benadryl and Rolaids. European austerity measures have also cut into the company's drug and medical device businesses. Overall sales have declined over the past two years. This year, however, sales are expected to rebound 6% as replacements for recalled products make their way to stores. Once-pricey J&J shares now sell for 13 times earnings, a discount of 15% or so to the broad market.

Public Storage
Dividend yield: 3.2%
Public Storage (PSA) is a real estate investment trust, which means it passes the bulk of income from its holdings, self-service storage facilities, to investors as dividends. Real estate and rents are subject to inflation, which means Public Storage should be able to keep up with rising consumer prices. Historically, it has far surpassed them. Over the past two decades, shareholders have received gradually rising dividends to accompany a 25-fold increase in their stock value. The company's fastest growth days are likely behind it, but current trends bode well. Occupancy rates and average rents have risen of late, and management recently boosted the dividend payment by nearly one-fifth.

Disclosure: The Div Guy owns shares of JNJ at the time of this post.

Most unloved companies won't stay that way for long, a new study concludes. By Jack Hough for SmartMoney

Shares of the largest two-dozen American firms sell for 20% less than those of other companies based on forecast earnings. Giants are priced like dogs, in other words. History says buy them; the stocks investors like least ("value" stocks) tend to outperform the ones they like most ("glamour" stocks) over long time periods. But little about these companies suggests a turnaround is afoot.

It might not matter. New research suggests value stocks outperform, not necessarily because the companies they're attached to improve, but because investors judge them too harshly to begin with, and later soften their criticism. That means today's investors can seek refuge in discounted companies with plump dividends, strong cash flow, global sales exposure and stable profits, and likely secure bigger price gains than they would chasing after market darlings. Some picks in a moment.

Some academics cling tightly to the belief that risk and returns are inseparable--that the only way to secure higher returns is to invest less safely. In seeking to explain the outperformance of value stocks, then, people in this camp say that modest valuations must be a sign of risk. Why else would companies trade cheaply, if not for their added likelihood of failure? There are problems with this view, however. For example, cheap companies don't show other signs associated with riskiness, like volatile share prices.

Nick Magnuson, an analyst at The Brandes Institute, an investment research group, offers a different explanation in the latest edition of Journal of Behavioral Finance. Investors, rather than companies, account for the value premium. Magnuson looked at performance data for the largest half of rich-country companies between 1990 and 2009. In an average year, the most expensive decile of stocks by forward price-to-earnings ratios went on to lose nearly 1% in value over the following year. The cheapest decile gained nearly 12%. That is, value outperformed glamour by a whopping 13 percentage points a year.

When Magnuson looked at earnings surprises, the results were, well, surprising. Glamour stocks gained after beating Wall Street's earnings forecasts but got clobbered after missing them. Value stocks rose even more than glamour stocks following beats -- and even rose following misses. Other performance measures like margins and sales growth showed similar trends. Value stocks did great when margins were expanding and good even when they were deteriorating, whereas glamour stocks did just OK and lousy, respectively, under the same circumstances. Value stocks shined whether sales were rising or falling, and glamour stocks, in neither case.

Magnuson reckons this means that the average value stock is merely in the first part of an investor cycle--overreaction to setbacks. Later parts of the cycle include a gradual shift in sentiment and expansion of price-to-earnings ratios.

Below are listed six giant companies that sell for a song based on earnings and that offer meaty dividend yields. All of them look properly unattractive. Exxon Mobil (XOM: 83.00) will collapse with the price of oil, of course, and Microsoft (MSFT: 26.78) won't figure out how to sell software in the age of cloud computing. General Electric (GE: 18.41) and Wal-Mart (WMT: 53.63) are too big to grow, Johnson & Johnson (JNJ: 67.45) will never correct its recent manufacturing missteps and AT&T (T: 30.31) will lose more from the death of landlines than it gains from wireless.

Unless, that is, investor fears are overblown. If that's the case, holders of these stocks will collect an average yield of 3.3%, and enjoy handsome gains once the public decides these companies aren't such dogs after all.

Company Dividend Yield
Exxon Mobil (XOM) 2.3%
Microsoft (MSFT) 2.4%
General Electric (GE) 3.3%
Wal-Mart Stores (WMT) 2.7%
Johnson & Johnson (JNJ) 3.4%
AT&T (T) 5.6%

Disclosure: The Div Guy owns shares of XOM, GE and JNJ at the time of this post.