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February
05
2021

Inflation Is Coming. Here’s How I’m Getting Ready
Brett Owens

If you’ve read my articles in the last few weeks, you may have noticed I’ve been writing about inflation more lately. I’m doing so because your income portfolios—especially your bonds!—are at risk as a result of recent money printing.

My recent monetary focus has taken many readers by surprise. After all, we haven’t seen sustained inflation in 40 years. Nothing like a four-decade lull to lure an investor into a false sense of “60/40 retirement portfolio” security!

But even though we’re staring at day-to-day deflation right now, with lockdowns hitting demand for most products beyond the essentials, make no mistake: the ingredients for inflation are there. Most obvious: the massive increase in the money supply, which has soared by $3 trillion since March, thanks to Federal Reserve Chairman Jay Powell’s printing press corporate-bond-buying program.

More Money, More Problems?

I’m not saying we should panic about inflation today. But we do need to keep it on our radar. Here are two ways you can prepare.

Gold has long been a mainstay in times of inflation—or any crisis, really. And for good reason: it does tend to beat stocks and bonds in a collapse, as the folks at Sprott Asset Management remind us:

Gold Outperforms in a Crisis

SPROTT ASSET MANAGEMENT

And the massive run gold has turned in year to date has the yellow metal within a whisper of its 2011 high.

Could we see a gold bubble for the first time in four decades? It’s gaining in popularity, but I wouldn’t call it “hot” yet, as I’ve gotten few gold questions from readers. That’s interesting for an asset that’s about to make an all-time high.

If you want to buy gold, there are a few ways to do it, besides buying physical bullion. You can go the ETF route, with the SPDR Gold Shares (GLD), or there’s the Sprott Physical Gold Trust (PHYS), a closed-end trust you can buy just as you would a closed-end fund (CEF). Both GLD and PHYS track the price of gold without saddling you with gold bars you’d need to pay someone to store.

But if you’re looking for income, you’re out of luck: GLD, like bullion itself, pays 0%. PHYS? The same.

What about shares of gold-mining companies? Sure, there are some that pay dividends. As I write this, Newmont Corp. (NEM), the biggest gold miner by market cap, yields 1.6%.

Two problems here (besides the meager yield):

1. Newmont’s dividend depends heavily on gold prices. That’s meant an overall rise in payouts in the last five years, but also long periods when the payout went nowhere—not what we want in a dividend payer:
   
   
2. Newmont is a crowded trade: While gold may not be in bubble territory, Newmont shares have soared, more than doubling the rise in gold prices this year!

That brings me to my favorite way to hedge your portfolio against rising inflation. You’ll collect a growing income stream, too.

The Income-Seekers’ Inflation Hedge (2 Simple Steps) 

Here’s what we’ll look for:

1. Dividends that outrun inflation: If we want to maintain our lead over rising prices, we need stocks with growing—and ideally accelerating—payout growth.That not only builds our income stream but, as I showed you last week, enhances your upside (and hedges your downside) because a rising payout acts like a magnet on a company’s share price, yanking it higher despite inflation, debt crises, pandemics—just about any disaster you can name.
   
   
2. A low beta rating: Beta is a volatility measure. A rating below 1 means the stock is less volatile than the S&P 500; above 1 is more volatile. That makes it easy: we want a rating of 1 or below so we can enjoy our dividends without taking extra risk.

This Soaring Dividend Crushes Inflation

Let’s put these two steps together with Roper Technologies (ROP), a stock I’ve recommended in my Hidden Yields dividend-growth service.

The firm specializes in enterprise software but is too smart to actually build the products itself. (Developing an “enterprise app” costs tens of millions of dollars and, once you’ve built it, who knows if you can sell it?)

Instead, Roper buys proven products and cross-sells them to its growing base of business customers. The firm is a cash cow that’s rewarded shareholders with a fast-rising payout since it started paying dividends in 1992!

Now let’s look at more recent history. Below is a chart of Roper’s dividend and share-price growth from October 9, 2007, the day the market peaked before the 2008/09 financial crisis, to today.

It’s a useful period to look at because it includes the two biggest crashes since the Depression, plus the period from December 2015 to December 2019, when the Fed aggressively hiked rates, something we’d surely see if inflation spikes.

As you can see, Roper’s shares have tracked its dividend higher, hike after hike.

Investors who bought then have seen a jump in their yield on cost, too. Even though Roper yields just 0.5% now, you’d be bringing home seven times that in dividends today on a buy made then, thanks to its 478% payout growth in that span.

Finally, let’s take a look at the beta rating, which you can find on just about any stock screener out there. According to Ycharts, it stands at precisely 1. That’s exactly the same as your typical S&P 500 stock and much less volatile than many bigger tech firms, like Apple AAPL -0.1% (AAPL) and Amazon.com (AMZN).

Brett Owens is chief investment strategist for Contrarian Outlook. For more great income ideas, get your free copy his latest special report: Your Early Retirement Portfolio: 7% Dividends Every Month Forever.

Disclosure: none

 

I graduated from Cornell University and soon thereafter left Corporate America permanently at age 26 to co-found two successful SaaS (Software as a Service) companies. Today they serve more than 26,000 business users combined. I took my software profits and started investing in dividend-paying stocks. Today, it’s almost impossible to find good stocks that pay a quality yield. So I employ a contrarian approach to locate high payouts that are available thanks to some sort of broader misjudgment. Renowned billionaire investor Howard Marks called this “second-level thinking.” It’s looking past the consensus belief about an investment to map out a range of probabilities to locate value. It is possible to find secure yields of 6% or more in today’s market – it just requires a second-level mindset.

  

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