Inflationary Pressure: 5 Stocks To Get Ahead of the Curve
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I have a problem. I have some money sitting in my portfolio accumulating next to nothing. Zilch. Zero.
It will actually earn less than zero over time. Inflation is eating away at my principal. Even low level price increases will result in a decline in real purchasing power over time.
Yearly inflation, as measured by the Consumer Price Index (CPI), has declined from 3% to 1.4% over the last 15 years with the long-term regression line going down to 2%. Assuming the best case that the trend continues (it is more likely to go up than down), 15 years from now today's dollar bill will have less than $0.75 worth of purchasing power: two quarters, a dime, a nickel and four pennies to be exact.
A hypothetical nest egg of $25,000 sitting in a money market account making 0.4% per year will grow to $26,543 in 15 years unless interest rates go up (they are more likely to stay the same or decline). The total return will be 6%. However, that will only provide $18,580 in real purchasing power based upon the current trend in inflation.
So I think I need to do better than losing about 1/4 of my initial principle. How can I get ahead of the inflation curve?
Well, first I ensure that I have a few months’ worth of living expenses stashed away which I will not touch. I also make sure that the money I plan to invest is not needed anytime soon for living (or other) expenses.
The rest of the money is fair game to invest in a place that, over the long haul, has proven to be the best inflation beater. It's not Treasury bonds. Not municipal bonds. Not corporate bonds. Not CD's or bank accounts. Or under your mattress. It is the stock market.
One strategy would be to invest some of the available money into one or two potential very high growth companies and put the rest in solid, middle of the road companies which consistently grow earnings, pay dividends and have plenty of cash flow. These stocks have, over the long haul, outperformed most other types of stocks and have beat inflation. And they are somewhat defensive and provide downside protection in the event of a more severe overall market drop. Peter Lynch, the former manager of the Fidelity Magellan Fund, calls them "stalwarts".
In the recent past (and maybe for the near-term future too) two of the more exceptional growth companies were Apple Inc. (NASDAQ: AAPL) and Chipotle Mexican Grill (NYSE: CMG). You would have had to recognize the huge impact that the iPod, iPhone and iPad would have on Apple earnings and the fact that people were lining up outside Chipotle restaurants to buy their distinctive menu items in order to realize a huge gain.
Since Sept. 1997 Apple stock has increased about 10 times and Chipotle stock increased by a factor of over 7. Until the last few months, CMG was even outperforming AAPL.
Not every company will provide those kinds of returns consistently. And the best case is that only two or three of these will find their way into your portfolio over time. There is no guarantee Apple and Chipotle will see those gains in the future. However, I wouldn't bet against their stock prices being higher two or three years from now. Apple is expected to announce the release of the latest iPhone model which should significantly increase earnings. And there are other products in the pipeline. If Chipotle management is as effective as it has been in the past at growing earnings the stock should keep increasing.
Getting back to the stalwart portion of the portfolio a company to consider is Abbott Laboratories (NYSE: ABT). It has plenty free cash flow (over $4.5B last year) and despite a "miss" last quarter will probably keep growing earnings over the long-term. It has a dividend yield of 3.1% and the payout has increased every year for the last 39 years putting Abbott on the Dividend Aristocrats, a group of companies that have grown dividends for at least 25 consecutive years.
Another stalwart is Coca Cola (NYSE: KO). The company has been around for over a hundred years and it is one of what I call "classic stocks" or those that keep performing at a high level for long periods of time like a classic rock band. It has a distinct advantage over all of its rivals based upon its great brands such as Coke, expansion into new markets and continued release of new products. It now offers 500 products in 200 countries worldwide. Who wouldn't recognize a bottle of Coke? Coca Cola is also a member of the Aristocrats, having increased its dividend every year since 1963. Lots of cash ensures it will probably keeping paying it. It currently yields 2.7%.
A third stalwart that could be part of an inflation buster portfolio is the maker of sticky notes, 3M Company (NYSE: MMM). 3M has been increasing earnings and has plenty of cash available. Its dividend of $2.36 per share results in a decent yield of 2.5%. It also is a member of the Dividend Aristocrats.
Looking back over the last 15 years would the model portfolio have beaten inflation? You can see by the chart below all the stocks would have beaten the U.S. CPI. The high growth companies, Apple and Chipotle, far exceeded the 15.46% increase in the CPI. The "worst" performer of the stalwarts, 3M, beat inflation by about 26%. Note that the returns include reinvestment of all dividends received.
Note that some other investments would have also beaten the CPI over the last 15 years. However, in today's low interest rate environment that probably will not be the case going forward, at least for the foreseeable future.
So in order to beat inflation in the future, and in some cases significantly beat it, you need to look for the type of stocks that have consistently done so in the past and stay away from the low yielder. Look for those one or two high flying growth companies (the next Apple or Chipotle) that increase earnings rapidly and maybe a few of the stalwarts with somewhat slower but steady growth.
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Mathman6577 owns shares of Apple and The Coca-Cola Company. The Motley Fool owns shares of Apple, Abbott Laboratories, Chipotle Mexican Grill, and The Coca-Cola Company. Motley Fool newsletter services recommend 3M Company, Apple, Chipotle Mexican Grill, and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.