The Must Own Stock To Beat Rising Inflation
Dear Wealth Watch Reader,
Inflation’s rising, but certain stocks and sectors benefit far better than others when it does.
Today I give you one of my favorites. As well as another you should steer clear of right now.
Read on below…
Stocks to Embrace and Avoid With Inflation on the Rise!
Both stock and bond markets have been on edge lately due to rising interest rates, and especially rising fears of inflation.
To be sure, inflation expectations bottomed out way back in mid-2016, not long after the Fed began raising short-term interest rates for the first time in nearly a decade.
Since then inflation fears have been gradually, but steadily, rising, as you can clearly see in the chart below:
The graph above displays the five-year expected rate of inflation five years out from now. As you can see it’s up considerably over the past two years, in spite of lackluster economic growth.
A lot of it has to do with the alarming rise in global debts, both public and private, since the last financial crisis. Debts that could be unpayable in the next recession or financial crisis.
But the key point here isn’t why. After 30-plus years of steadily declining interest rates and inflation, most investors today are woefully unprepared for the return of inflation.
Look at the record inflows to fixed-income mutual funds and ETFs over the last 10 years. It’s a disaster waiting to happen!
So how do investors in search of income cope with a rising inflation environment?
First, seek out the sectors and stocks that benefit from rising prices: namely, commodity producers.
A few favorite sectors of mine include metals and mining and energy shares. Basically, look for stocks that are:
- Leading and low-cost commodity producers or…
- Have superior pricing power for the products or services they sell.
It’s really that simple.
Oh, and do everything in your power to AVOID the opposite at all costs. That is, steer clear of companies with little or no pricing power that will become victims of inflation as their production costs rise faster than their revenues.
Here are two examples of the kinds of companies to embrace and avoid with inflation on the rise.
Nucor Corp. (NYSE: NUE) pays a 2.4% dividend and is a leading and low-cost steel producer. The price of this commodity will almost surely keep pace with rising inflation, which is why companies like NUE typically perform well in a rising inflationary environment.
On the other hand, a stock you may want to avoid is …
Johnson & Johnson (NYSE: JNJ). I know, it’s the bluest of blue chips, with a history of rising dividends, but JNJ also has a sky-high dividend payout ratio of more than 700%, which could prove unsustainable if cash flow gets squeezed due to rising inflation.
Bottom line: Certain stocks and sectors benefit in a cycle of rising inflation, namely commodity producers like energy and basic material stocks.
Others can get crushed as their input costs rise faster than their selling prices.
In this case you may want to avoid consumer stocks with poor pricing power.
Here’s to growing your wealth,
Chief Income Expert, Mike Burnick’s Wealth Watch