Jun 22, 2022
U.S. consumer prices rose 8.6% in May from a year ago, marking the biggest increase since December 1981. But according to pollster and GOP political strategist Frank Luntz, things are about to get a lot worse.
“We are 13 days away from an absolute explosion on inflation,” Luntz told CNBC last week, referring to the upcoming 4th of July weekend.
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He explains that Independence Day, Thanksgiving, and Christmas are three holidays where Americans hit the road and “buy more food than any other time of the year.”
“They can’t put $40 or $50 in their tank, they actually have to fill it up. And that’s when the explosion hits,” he adds.
To combat runaway inflation, the Fed announced a 0.75 percentage point rate hike this month, marking its biggest interest rate increase since 1994. But it remains to be seen whether that’s enough to cool down spiking price levels.
The good news? Even in a period of high inflation, a handful of sectors can still make you money.
Utilities
It’s easy to see why utilities usually have the ability to withstand inflation: No matter how expensive things get, people will still need to heat their homes in the winter and turn the lights on at night.
The business also has high barriers to entry.
It’s extremely costly to build the infrastructure required to distribute gas, water, or electricity. Plus the industry is highly regulated by the government.
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As a result, utility companies usually operate as monopolies or oligopolies in their respective operating regions. And due to the recurring nature of the business, the sector is known for providing reliable dividends to shareholders.
The best part? Utility companies like Consolidated Edison (ED), American Water Works (AWK), and NextEra Energy (NEE) have been increasing dividends year after year.
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Food
Next, we have the food industry, which includes grocery stores, food distribution companies, and food producers.
No matter where we are in the economic cycle, people still need to eat.
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Case in point: While the COVID-19 pandemic presented serious challenges for numerous brick-and-mortar businesses, supermarket giant Kroger (KR) continued to thrive.
Kroger shares have climbed 6% in 2022, in stark contrast to the broad market’s double-digit decline.
Then there’s PepsiCo (PEP), which has 23 brands that each generate more than $1 billion in estimated annual retail sales. Sure, inflation could drive up costs, but management plans to take “good, strong price increases” to counteract those pressures.
In the food industry, higher costs are usually passed on to consumers.
Apartments
Real estate is a well-known hedge against inflation. As the price of raw materials and labor goes up, new properties are more expensive to build. And that drives up the price of existing real estate.
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But not all properties are the same.
To prepare for uncertainty in this economic climate, look into apartments.
No matter how much economic growth slows down, people need a place to live. And with real estate prices rising to unaffordable levels in many parts of the country, renting has become the only option for many people.
You can always buy an apartment building yourself, find tenants and collect the monthly rent checks. Of course, apartment-focused REITs can do that for you.
For instance, Camden Property Trust (CPT) owns, manages, develops and acquires multifamily apartment communities. It has investments in 170 properties containing 58,055 apartment units across the U.S. and offers an annual dividend yield of 2.8%.
Essex Property Trust (ESS) invests in apartments primarily on the West Coast. The REIT currently yields 3.4%, backed by its ownership interest in 253 apartment communities — in California and Seattle — totaling approximately 62,000 units.
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Jing is an investment reporter for MoneyWise. He is an avid advocate of investing for passive income. Despite the ups and downs he’s been through with the markets, Jing believes that you can generate a steadily increasing income stream by investing in high quality companies.
