When fighting the ravages of inflation, dividend investing is a key strategy. But that doesn’t necessarily mean focusing on the highest yields.

After five years of the US Federal Reserve’s zero interest rate policy, many investors, particularly those in retirement, have been lured into sinking their money into high-yield companies to generate sufficient income just to meet their expenses.

While yields of 8 percent or higher might be attractive in the current environment, they could end up being a “dividend trap” over the long haul if they aren’t growing. As inflation heats up and the cost of living rises, stagnant dividends will gradually lose buying power along with everything else.

The best strategy for keeping up with inflation is to focus on companies yielding between 2 percent and 5 percent, but delivering steady growth in their payouts. This approach does give up some income, but it’s a smarter bet over the long haul.

Those tend to be larger, blue chip companies that also have strong pricing power in their respective markets, so their cash flows increase even as inflation heats up. As a result, they’re able to steadily increase their dividend payouts at a rate that ideally exceeds that of inflation.

Those same companies are also likely to be generating capital gains precisely because they’re able to produce reliable cash flow and profit growth.

Between capital gains and growing dividends, investors are able to live comfortably in inflationary periods with a minimum drawdown on their investment principal.

Below are two companies that fit the bill.

Over the past five years, Kimberly Clark (NYSE: KMB) has grown its dividend by better than 3 percent annually while generating a total return of 64.7 percent, thanks to the addition of capital gains. Going back even further, it has increased its total dividend payout in each of the past 10 years.

That’s an extremely impressive performance from a company that mainly makes tissue paper, diapers and feminine care products. The company does have exposure to commodity prices by way of paper pulp, making iconic brands such as Kleenex and Huggies which are sold around the world. However, it’s able to pass much of any increase along to consumers. That, in turn, allows it to generously reward its investors with a payout ratio that holds steady in the mid-60 percent range while reliably increasing the absolute dividend paid.

TransCanada (NYSE: TRP) has increased its dividend as reliably as Kimberly Clark, sustaining a yield of about 4 percent and generating a total return of 58 percent over the past five years.

Maintaining a network of oil and natural gas pipelines and essentially collecting tolls on the volume of commodity moved, the company has little direct exposure to commodity prices. But it is still able to maintain its pricing power to a large degree because of the fixed nature of its network, giving commodity producers in the regions it covers little choice but to use its services. That allows it to maintain a higher payout ratio of about 75 percent.

Given the power of Kimberly Clark’s brands and TransCanada’s assets, there is little reason to doubt that both will be able to retain their competitive advantages over the long haul. TransCanada is more economically sensitive; the company has cut its dividend once in the past decade, though it quickly made it up. However, both companies should be able to support their dividends and continue generating capital gains, year in and year out, even as the pace of inflation ticks up.

Portfolio Updates

Johnson & Johnson (NYSE: JNJ) reported better-than-expected third quarter results, largely thanks to a 10 percent jump in drug revenue to $7 billion.

While the company’s chief financial officer made specific mention of the improving economy on the earnings conference call, it was also noted that sales at the medical device division fell by 2 percent to $6.9 billion, largely thanks to patients hesitating to undergoing elective procedures. Sales at the consumer division were essentially flat.

But due to a sharp increase in drug sales, JNJ managed overall revenue growth of 3 percent to $17.6 billion, with earnings per share (EPS) coming in at $1.36, a 9 percent year-over-year increase.

Management said that it expects full-year EPS to come in between $5.44 and $5.49, a three-cent increase on previous guidance, with the mid-point revenue guidance falling at $70.6 billion.

Johnson & Johnson remains a buy up to 100.

Wells Fargo & Co (NYSE: WFC) posted its 16th consecutive quarter of profit growth, hitting $5.6 billion, or $0.99 in EPS, in the third quarter. That was despite the fact that revenue declined slightly from $21.2 billion in the same period last year to $20.5 billion in the quarter.

A sharp decline in mortgage originations spurred the dip in revenues as the expectation of rising interest rates prompted many borrowers to hold off purchasing or refinancing a home. Overall, total originations fell 42 percent year-over-year to $80 billion.

Nonetheless, the bank’s total loan portfolio grew by 4 percent in the quarter to $812.3 billion, driven by growth in commercial real estate and automotive loans as well as credit cards. The bank’s overall credit quality also improved as nonperforming assets fell by 18 percent, allowing the bank to release $900 million from its reserves.

The brokerage division also reported that profits were up by a third in the quarter and the community banking division’s profits were up 22 percent year-over-year.

While rising interest rates will tamp down refinancing activity for the foreseeable future, WFC can clearly make up that ground in other loan markets, largely due to gradual improvement in the US economy. That steady improvement should also continue to prompt home purchases, especially as affordability indicators remain favorable.

Continue buying Wells Fargo & Co up to 45.