Stocks for Inflation Protection
Have you seen prices at the grocery store lately? How about the gas pump? I hope you’re not on the market for a car or home right now! Prices of everyday goods have gone up quite a bit over the last several months. Americans are feeling it in their wallets. They’re also looking for stocks for inflation.
Inflation usually happens for two reasons. One, here is a high level of employed Americans, spending money and adding to the economy. If businesses cannot produce enough to meet the increased demand from American consumers, then prices can increase. Two, sometimes, the cost to produce goods increases to a point where businesses must raise prices to customers.
What Is Going On?
Right now, we have a little bit of both. COVID-19 related stimulus left many Americans with extra money in their pockets. Since they couldn’t travel or go to restaurants during the pandemic, they bought a lot of stuff! At the same time, many folks could not return to work. Because there is a shortage of workers, companies have not been able to keep up with customer demand.
When you combine all these factors, you get high inflation. In fact, inflation over January and December has been the highest in over forty years. That includes everything from building materials to computer parts.
Stocks For Inflation Protection
Worried that inflation could hurt your stock portfolio? I can see why you’d be concerned. Some analysts believe high inflation could continue until 2023.
A little inflation each year is a good thing. High inflation for long periods is not good for anybody. Though, some companies can handle inflation much better than others. That might include the companies in your portfolio. These companies have pricing power.
Pricing Power is also called price elasticity. Pricing power gives a company the ability to raise prices for the goods or services they produce without customers leaving. They’ll need to do this when their costs go up.
Companies create Pricing Power in many ways.
Brand Stocks For Inflation
For instance, a company may have a strong brand and customer loyalty. When their cost is up, they can increase their prices.
Here are some stocks that would fit into the brand category:
- Starbucks Corporation (Nasdaq: SBUX): Recently issued a press release. The press release cited higher-than-expected inflation. The company also increased prices for its coffee multiple times. They even said that the demand is for their coffee is up.
- Chipotle Mexican Grill (NYSE: CMG): Chipotle also announced that it is seeing higher beef costs. Because of brand loyalty from customers, it increased menu prices.
- The Coca-Cola Company (NYSE: KO): Coke said that it expects cost inflation to continue in a press release. In the same press release, the company also reported that its shipments were up 9% in the fourth quarter.
Commodity Stocks For Inflation
Commodity companies are another example. These companies all sell the same thing. For example, Exxon, Chevron and ConocoPhillips all sell oil. Other commodity industries include gold, silver, lumber, natural gas, steel, corn, wheat, soybeans and many more.
Commodity prices rise and fall with the economy, weather, or other factors. When all companies in the industry sell the same thing, the prices they can charge rise and fall in tandem.
Here are some stocks that would fit into the commodity category:
- Barrick Gold Corporation (NYSE: GOLD): Barrick is one of the largest gold mining companies in the world. Gold has long been known as a hedge against inflation. In the past, gold has negatively correlated to the U.S. Dollar.
- ConocoPhillips (NYSE: COP): ConocoPhillips focuses on locating and producing oil and natural gas. Oil prices have gone up in 2022 so far.
- Freeport-McMoRan (NYSE: FCX): Freeport McMoRan is one of the largest copper mining companies. Copper is commonly used in construction and electrical wiring.
Best Dividend Stocks For Inflation
A stock that pays a regular cash dividend can take the sting out of inflation. Especially stocks that will increase their dividend over time.
Here are some stocks to consider for dividend yield:
- Philip Morris International (NYSE: PM): Philip Morris is a cigarette maker. So, the stock might not be suitable for everyone. The stock currently pays a dividend yield of over 4.75%
- JPMorgan Chase & Co. (NYSE: JPM): JPMorgan is one of the largest banks in the U.S. The stock yields just over 2.5%.
- Rio Tinto Group (NYSE: RIO): Rio Tinto is an international commodity company. The company periodically pays special dividends in addition to its regular dividend. Rio Tinto has had the highest dividend rate over the last year. Keep in mind, though, the dividend changes with company profits.
Invest With Caution
An old joke goes like this: “Why did God create economists? In order to make weathermen look good.” Accurately predicting the economy or inflation is nearly impossible. Even the best economists in the world get it wrong quite often. Keep in mind there is risk in investing to protect against an inflation prediction.
In addition, you should consider your real rate of return. If you’re investing in a dividend stock to protect against inflation, the dividend may or may not match it. If inflation is higher than your dividend, your dollar might not go as far.
About BJ Cook
BJ Cook is a long-time stock nerd. He has held several roles in the equity research world and earned the right to use the CFA designation in 2014. When he’s not writing for Investment U, you can find him searching for new investment ideas. Outside the investment community, BJ is a die-hard Cubs fan.