Investing For Inflation

By the time many of you will read this post, the U.S. government will have announced its Q2 GDP numbers, which came in at 4.1% – almost double the 2.2% reported in the 1st quarter. According to the June 2018 report of the Bureau of Labor Statistics (BLS), the CPI (inflation) index for the past 12 months rose 2.9%. With an economy that’s starting to bubble, companies are likely to feel cost pressures, which means the Fed is likely to continue increasing interest rates in order to tame inflation from entering “runaway” territory.

So, in an environment where inflation creeps up – albeit ever so gradually – what can you, as an investor, do to protect your portfolio?

Inflation-proofing portfolio ideas

While you might find any number of complex hedging and futures strategies out there, to help you deal with the impact of inflation on your investments, there are a couple of simple inflation-proofing realities you should be aware of:

  • Inflation usually comes with rising interest rates – so, investing in companies that are disproportionately impacted by rising interest rates could drag your portfolio returns down
  • Rising inflation also means rising costs (raw materials, labor, utilities, fuel etc.) – so, investing in stocks that are excessively hit by cost increases can be bad for your overall portfolio returns

Now, having said that – what types of stocks should you invest in during inflationary times? Well, if the two points above didn’t give you enough of a clue, lets spell it out more clearly:

  • Invest in companies that can recover higher interest rates from their clients
  • Invest in companies that can pass on rising costs to their customers

And with that out of the way, lets take a look at our inflation-proofing ideas:

1) Mid-America Apartment Communities, Inc. (MAA)

This Real Estate Investment Trust (REIT) acquires, owns, manages and develops/redevelops a string of high quality apartment complexes across 17 states and the District of Columbia. As of Q1 2018, MAA had 100,490 apartment units in its portfolio of real estate assets.

Sure, rising interest rates will mean MAA will pay more to borrow (to acquire, fix-up and maintain its buildings/apartments). However, residential REITs can easily pass on those costs to their tenants in the form of rent increases. And that makes MAA an ideal inflation-proof investment.

2) Vanguard Real Estate ETF (VNQ)

If you are a bit hesitant about stock-picking in the REIT space, then you could substitute VNQ, in place of MAA in your portfolio, and still get great inflation protection. VNQ also offers great diversification in its real estate holdings, including commercial, residential and industrial properties and service companies. With a low MER of just 0.12% (90% lower than other comparable holdings), VNQ currently promises a yield of over 3.5%.

3) Dollar General Corporation (DG)

This is a quintessential holding for anyone wishing to “inflation proof” their portfolio. When an economy faces inflationary pressures that drives up the cost of everyday essentials – toilet paper, dish detergent, school supplies, trash bags, cleaning supplies, bread, eggs, frozen foods and small electronic goods – it drives consumers away from the Walmart’s and Costco’s of the world, and right into the parking lots of DG – in droves!

Rising interest rates mean that DG may have to pay more to fund its inventory purchases. However, they can increase their costs by a factor of Inflation Plus-x, and still maintain (or even improve) their bottom line. With over 14,500 stores spread across 44 states, DG is well placed to serve a growing number of highly cost-conscious customers in inflationary times.

Portfolio performance

Inflation has been a concern for consumers for the past several months now. Since the Q1 CPI numbers were published, analysts were talking about more to come. And with the most recent GDP numbers showing the U.S economy is in good shape, inflation will likely start creeping up too.

Mid-America Apartment Communities, $MAA, Vanguard Real Estate ETF, $VNQ, Dollar General Corporation, $DG

If you would have held these three names in your portfolio over the past two months, you could have been handsomely rewarded by an average price-move of 4.5%. Your total returns however would have been much higher once you factored in the dividend/distributions you would have received.

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Author does not have investment in stock discussed in this article.

With a Bachelor's degree in Commerce (with Accounting/Finance as a major), a diploma in Technology Management and Entrepreneurship, and Microsoft’s IT Infrastructure Library (ITIL) certification (including from the London Chamber of Commerce and Industry, and the University of New Brunswick in Canada), Monty brings a diverse repertoire of analytical and writing skills to the team. Monty’s vast international work experience, in Audit, Tax, Project Management, IT and Management Consulting, including with companies like Price Waterhouse, Peat Marwick and KPMG, adds a unique perspective to the content he produces.