Which Stocks Are the Best To Invest in During Inflation?

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Inflation is on the rise, making it a challenging time for stocks. With prices rising, consumers have to reduce the amount of goods they buy, so companies are bringing in less revenue. At the same time, companies’ costs are going up too, so they’re paying more for the materials they need to make their products, the rent on their facilities and the wages of the employees they depend on to get the products out the door.

Still, there are some kinds of stocks that do better during inflationary times than others. Typically, these are the stocks of companies that make products that consumers will buy no matter how pricey they get, or companies that provide some type of hedge against inflation. Many of the stocks that perform well as prices rise pay a dividend, generating a little extra cash when costs are going up.

Here are some sectors and stocks that may do well when prices are rising.

Real Estate Investment Trusts

Real estate investment trusts, or REITs, are companies that own commercial, retail or residential properties and rent them out. When prices rise, rents rise too, and REITs can quickly adapt to rising prices. Since their properties are already built, they don’t have the exposure to rising material costs that manufacturing companies do.

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UMH Properties, Inc. (UMH) is a REIT that owns and operates mobile home communities in New York, New Jersey, Pennsylvania, Maryland, Ohio, Indiana, Michigan, Tennessee, South Carolina and Alabama. Their prefab homes are attractive to those who might otherwise be priced out of the real estate market. The company’s stock closed at $19.74 on July 20, 2022, and has a one-year target estimate of $26.50. It also pays a dividend, with a current yield of 4.08%. It has a recommendation rating of 1.7 on a scale of 1 as a strong buy to 5 which is a sell.

Stag Industrial, Inc. (STAG) is a REIT that operates industrial properties. The company currently operates 551 buildings in 40 states, comprising 110 million square feet of space. This stock also pays a dividend, currently yielding 4.69%. The stock has a one-year target estimate of $41.60 and closed on July 20 at $31.11. Of the 14 analysts who cover it, 8 of them rated it a buy or a strong buy, 5 recommend holding it and one rated it underperforming.

Mineral Mining Stocks

Precious metals, like gold and silver, tend to rise both in inflationary times and in times of market volatility. If you don’t want to store bars of gold in your house, you can invest in a company that mines precious metals.

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Barrick Gold Corporation (GOLD) is a producer of gold and copper, with projects in 18 countries in North America, Africa, South America, Saudi Arabia and Papua New Guinea. Barrick pays a 2.5% dividend yield and has an analyst recommendation rating of 1.9 out of 5 — with 1 being a strong buy.

Alcoa (AA) has the dual benefit of being a mining company and a consumer staples company, which is another sector that tends to perform well when inflation is high. Alcoa mines aluminum and other commodities and processes them for industrial and commercial applications, as well as producing the aluminum foil you probably have in your kitchen. Of the 14 analysts who follow Alcoa, 3 rate it a strong buy, 6 rate it a buy and 5 recommend holding the stock.

Energy Stocks

When inflation is high, people may give up their expensive vacations or dinners out, but they will still heat and cool their homes and offices. So energy stocks tend to be solid performers even as prices rise.

EOG Resources, Inc. (EOG) is a crude oil and natural gas exploration and production company with reserves in the U.S. and in Trinidad. EOG closed at $105.57 on July 20 and has a one-year target estimate of $147.98. Its dividend yield is 2.90%, and it doubled its dividend in 2021. The stock is followed by 35 analysts, 21 of whom rated it a buy or a strong buy. 14 recommend holding it.

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ConocoPhillips (COP) is an E&P company for crude oil, natural gas, natural gas liquids, liquified natural gas and bitumen. They have operations in 14 countries worldwide. While ConocoPhillips has long been focused on oil discovery and production, it is now making the shift toward natural gas. COP has a one-year target estimate of $123.92 compared to its July 20 closing price of $90.71. It has a combined analyst recommendation of 1.9 on a scale of one to five.

Exchange Traded Funds

Exchange traded funds are not individual stocks, but they may be a good option during inflationary times. ETFs are comprised of a group of stocks that are selected to mirror the performance of a specific index. The key to choosing an ETF is to find an index that outperforms the general market, and then find an ETF that tracks that index.  

Here are a couple of ETFs to consider.

SPDR S&P Metals and Mining (XME) aims to provide results that correlate to the mining sector of the S&P 500. The sector includes aluminum, copper, gold, diversified metals and mining and other industries. XME includes holdings in companies like Alcoa Corp., Royal Gold, Inc., Commercial Metals Co., Steel Dynamics, Inc. and more.

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Invesco DB Commodity Index Tracking Fund (DBC) is a commodity futures ETF. Commodity futures trading can be very lucrative but it is also very risky, even when overall market volatility is low. This ETF tracks changes in the DBIQ Optimum Yield Diversified Commodity Index Excess Return, which includes futures contracts on 14 of the most heavily traded physical commodities. The results of this ETF can still be volatile, however, so it’s not appropriate for the beginning investor.

Final Take

Inflation can be risky for stocks, but there will always be those that outperform the market. Finding and investing in those positions will help you weather the storm until inflation subsides.

Information is accurate as of July 21, 2022.