INVESTING
This Portfolio Beats Inflation
But can you embrace boring?
It seems like there’s a new, higher inflation figure every day.
As of writing, the latest numbers are around 8.5% year-over-year, the highest since those painful years of the late 1970s and early 1980s. It’s a level that neither I nor many of you have ever witnessed.
Perhaps it’s peaked, perhaps it hasn’t. Either way, everything from carrots to cars is bound to cost even more next month and next year.
Fortunately, holding the right assets can not only protect but even build your purchasing power while inflation runs its course.
But what, exactly, might those be?
I’m not a financial professional. This is purely opinion and entertainment, not advice. Do what’s right for you, and if in doubt about what that is, then it’s important to find someone who’s legally able to tell you.
The usual suspects
On the mundane end of the spectrum, there are TIPS bonds, whose value adjusts to track the CPI. But they have no possibility of beating inflation, and seldom make sense to hold once inflation has dropped. As I see it, they’re a highly defensive, conservative, short-term play.
A far trendier choice is Bitcoin, the heralded hedge to inflationary fiat woes. The only problem? It’s down by a quarter from this time last year.
Good old gold, the stalwart companion of inflation doom-and-gloomers, has fared better at around 7%. Not shabby, but still a net loss in purchasing power.
Even the Nasdaq index of (mostly) high-tech heavyweights has slipped a few points, the broader-based S&P 500 has risen only a couple, and neither offers much dividend growth.
These and many other assets might make sense to own for other reasons. But as for coming out ahead of inflation, ideally with assets worth holding long-term?
Time to look elsewhere. Fortunately, it doesn’t take an economics degree to do so. Some of the best ideas are (perhaps literally) under your nose.
Some delightfully dull alternatives
You might think I’m about to suggest the next hot tech company or alt coin or other risky security.
That couldn’t be farther from it.
Rather, we’re talking about the dividend-paying companies that make the everyday items that make the world go ’round. Things like mouthwash and tea and taxi fares, whose prices contribute to the CPI.
Sure, producer prices may squeeze their margins for a bit, but when all is said and done, many of these firms have significant pricing power. After all, they generally produce or provide things we can’t realistically cut back on.
Consequently, some of have increased their dividend by (roughly) as much as inflation — sometimes even more — on top of share price growth.
These firms have track records of strong, inflation-beating dividend growth, some over the course of many decades. Here are three such businesses that I either own or am closely considering.
Archer-Daniels-Midland (ADM)
For instance, earlier this year, food and commodities giant ADM hiked its dividend by 8.1% (making this the 47th year of consecutive increases) and saw roughly 50% price appreciation. As of writing, their payout ratio is just over 30%, which suggests sustainable use of 2021–2022’s bumper profits.
Incidentally, their business includes a massive commodities trading operation. Like all brokerage/clearing businesses, it profits partly from volume of activity, so it should be a nice buffer if/when commodities prices take a tumble.
Nasdaq (NDAQ)
I mentioned earlier that the Nasdaq index hasn’t done so hot over the last year.
But its owner, Nasdaq, Inc.? Now we’re talking.
Unlike the sexy start-ups on its namesake index, Nasdaq itself is a nuts-and-bolts provider of critical financial services. NDAQ’s share price grew only a few percentage points this past year, but management recently announced a whopping 11.1% dividend increase (for a modest payout ratio of about 31%). While nothing is certain, it’s clearly a firm capable of thriving in inflationary conditions.
Chevron (CVX)
In my book, the big story isn’t Chevron’s staggering 55% year-on-year price increase, due partly (but not primarily) to the turmoil in Ukraine. What really piques my interest is their 6% dividend increase announced before the situation escalated and oil prices surged.
(Remember, energy prices are too volatile to be part of the CPI, but they’re directly related to inflation.)
The payout ratio stands a bit over 60%, which (in my estimate) doesn’t pose a threat to their status as a Dividend Aristocrat.
Many other firms belong on this list of inflation-beaters. What’s more, I’m sure others will announce 8%+ dividend increases in the coming months.
Take these not as specific recommendations, but as examples of how big, familiar, and frankly unexciting businesses can help your portfolio conquer inflation and lay a solid long-term foundation at the same time.
No low-cap crypto or doomsday gold-hoarding required.
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