The last few years have been great for income investors who are holding on to dividend stocks because inflation has been relatively flat. However, it appears that things are picking up again, which could be bad news for some investments — namely, bonds and some dividend stocks.
An increase in inflation isn’t necessarily a bad thing for the stock market, especially if inflation is rising slowly and signals economic improvement. That appears to be what’s happening now; the consumer price index rose 2.7% in February, a five year high.
With that in mind, income investors should be on the hunt for stocks to buy whose dividends can increase as inflation does. That means that some sectors like utilities should be avoided, while others like financial services could provide some insulation.
All three offer investors a bit of shelter because they could benefit from rising inflation and would be able to pass some of that upside on to shareholders.
Stocks to Buy to Battle Inflation: Royal Dutch Shell plc (ADR) (RDS.A)
With a dividend yield of 7.2%, it’s hard to imagine that income investors could expect any more from Dutch oil and gas company RDS.
However, the firm is a pretty safe bet should inflation gain momentum. Investing in commodities is a traditional way to hedge against inflation and RDS.A is a good pick because the company is well run and has a lot of upside potential over the course of the next year.
Shell recently acquired BG Group, a massive purchase that hasn’t realized its potential quite yet. RDS.A CEO Ben Van Beurden has said that the acquisition will save the firm some $4.5 billion by 2018.
Not only that, but rising oil prices should come alongside rising inflation and RDS.A will probably pass some of those benefits onto its shareholders.
Stocks to Buy to Battle Inflation: CME Group Inc (CME)
Exchange operator and clearinghouse CME group is another good bet for inflation-protected stocks to buy.
CME has claimed around 90% of the futures trading and clearing services market, so the firm has a lot to gain from rising inflation. As prices rise, there is likely to be a higher degree of volatility and in that kind of environment, investors can expect to see higher trading volumes — a benefit to CME.
CME is a solid income stock as well. While its dividend yield clocks in at just 2.21%, that payout is reliable and management has proven that it is committed to returning value to its shareholders with an end-of-year variable dividend through which it shares out some of its excess cash flow with investors.
Over the last four years, CME has paid out more than $7.5 billion in dividend payments and investors can expect those figures to rise as the company’s financial strength improves in the years to come.
Stocks to Buy to Battle Inflation: Home Depot Inc (HD)
DIY and home improvement chain Home Depot is one of the best stocks to buy as inflation rises because the retailer stands to benefit from an improving housing market.
A strong housing market will increase the amount homeowners are willing to spend on home projects and HD stock will reap the benefits.
Not only is Home Depot likely to withstand inflation increases, but the company is also likely to continue thriving in an increasingly challenging retail environment.
While many brick-and-mortar stores have had to close up shop due to rising competition from e-commerce, HD shoppers are still interested in visiting the store, so the firm has been able to grow its online sales alongside its in-store sales instead of trading one for the other.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.