The specter of escalating inflation is rearing its ugly head, and that’s not good news for investors. in June surged by the most since 2008, further strengthening a case for the Federal Reserve to hike interest rates earlier than anticipated.

If that happens, equity values will decline and investors will move their funds from high-growth stocks to safe havens such as government bonds. For equity investors, dividend stocks that raise their payouts faster than the rate of inflation are one effective avenue to consider. 

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

1. Home Depot

The U.S. home improvement giant Home Depot (NYSE:) has a remarkable track record of boosting its payout much more quickly than the rate of inflation. During the past 10 years, the home renovation giant has delivered, on average, 22% annual growth in payouts. 

Home Depot Weekly Chart.

There is a good possibility the Atlanta-based retailer will continue providing this kind of growth during the next 10 years as well. Just before the deadly pandemic hit, the home improvement chain, which operates in the U.S., Canada, Mexico as well as in Puerto Rico and Guam, had completed an $11-billion restructuring plan to modernize the company’s stores, upgrade digital options and enhance offerings for its key trade customers. 

Armed with these upgrades, Home Depot is in a cycle, especially when such factors as a red-hot real estate market and the evolving ways in which people now use their homes, are fuelling sales of home-furnishing and improvement products.  

With an annual dividend yield of 2%, the company offers a quarterly payout of $1.65 a share. And, with a manageable payout ratio of 50%, the dividend payout has much more room to grow. The stock, which closed yesterday at $317.05, has gained about 20% this year.

2. Starbucks

The global coffee-chain operator Starbucks (NASDAQ:) is another suitable candidate for earning growing dividends each year while also investing in a top-rated consumer stock. 

During the past five years, Starbucks has grown its payout more than 20% each year, highlighting management’s strong focus on returning capital to stakeholders. The company, with an annual dividend yield of 1.57%, pays $0.45 a share quarterly.

Starbucks Weekly Chart.

After receiving a severe blow to its during the pandemic, the company is quickly regaining its lost ground. Sales are forecast to grow to between $28.5 billion to $29.3 billion in this fiscal year, well on track to surpass the $26.5 billion that company made in fiscal 2019. If the reopening of the global economy remains on track, these projections could even prove to be conservative.

During the pandemic, Starbucks’ payout ratio spiked as its earnings plunged. But historically, the specialty coffee purveyor has proven to be a safe bet for fixed income investors with its payout ratio hovering around 50%. As sales return and the company’s cash position improving, SBUX is in a good position to reward its investors.

These expectations have fuelled a strong rally in the company’s stock, which has gained 60% during the past 12 months, closing yesterday at $119.55.

3. Microsoft 

If you’re looking to earn cash from your stock positions, it’s not a bad idea to buy shares of technology companies that generate recurring revenue from their established products. As the provider of the Windows operating system and Office software, Microsoft (NASDAQ:) certainly fits the bill.

The Washington-based Microsoft offers a great combination of both income and growth to investors. The company currently pays a dividend of $0.56 a share, for a current yield of just under 1%, which has grown about 10% per year during the past five years, providing enough cushion to beat inflation.

Microsoft Weekly Chart.

But the dividend growth isn’t the major reason investors hold MSFT stock. The company is in a solid expansion phase, which means more upside for its shares. In the most , its quarterly sales grew at one of its strongest rates in years.

Revenue rose to $41.7 billion for the fiscal third quarter, up 19% from a year earlier, its biggest quarterly increase since 2018. Profits jumped 44% to $15.5 billion as more corporate customers signed up for Microsoft’s Office productivity software as well as accelerating their transitions to cloud infrastructure, which MSFT’s Azure segment provides.

Microsoft shares have gained more than 25% this year, after a 40% surge in 2020. They closed yesterday at $280.98, a gain of just over 1% on the day.

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