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Three Proven Ways to Protect Your Portfolio from Inflation

Higher inflation has been rough on us all.

And unfortunately, it could get worse.

With surging costs for gas, food, and housing, consumer inflation soared 7.9% year over year.

That’s the biggest spike we’ve seen in 40 years.

Housing costs – which make up about a third of the consumer price index – rose sharply. Home prices were up 18.8% in 2021. Rent was up 17.6%.

According to John Catsimatidis, the billionaire owner of supermarket chain Gristedes says, “I’ve seen price increases coming through for the month of March. I’ve seen them coming through April and May. Between price increases and shrinkflation — where it used to be 32 ounces, now it’s going to be 28 ounces – it’s anywhere from a 12 to a 20% increase in food prices.”

Also, between January and February, grocery costs are up 1.4% — its biggest jump in 32 years. Fruits and vegetable prices were up 2.3%. Gas prices were up just under 7%.

And, according to The Response of Consumer Spending to Changes in Gasoline Prices, gasoline spending was 3% of the household budget when gas prices were at $2.

With oil prices now double that amount, it suggests gasoline spending is now closer to 6% of the household budget. “The research suggests that spending on gas is likely to cause a corresponding drop in spending elsewhere in household budgets, working out to approximately be a 3% reduction,” added Forbes.

That’s further proof inflation was never transitory. Most of us knew that… except the Fed.

To help cool inflation, the Fed just raised rates by a quarter point.

For 2021, the central bank is penciling in another six rate hikes. For 2023, we could see another three hikes, with no hikes in 2024. In addition, officials are signaling they expect the rate to rise to about 2% by the end of the year. By the close of 2023, the rate could be up to 2.75%.

However, we have to consider that it will take some time for Fed action to curb inflation.

Also, “When the Fed does lift rates, it’s also likely that people will see the downsides of those increases before any improvement on inflation,” said Tara Sinclair, a senior fellow at the Indeed Hiring Lab, as quoted by CNBC.

“Basically, that means consumers may have to pay more to borrow money and still see higher prices at the gas pump and grocery store. That scenario is particularly tough on low-income workers, who have seen wages rise but not keep pace with inflation,” added CNBC.

In short, inflation could get worse before it gets better – oh joy!

So, what’s the best way to protect your portfolio from inflation? Consider these three stocks.

Bank of America (BAC)

Analysts are bullish on Bank of America because it’s one of the most sensitive to interest rate hikes. According to Barron’s, “With it widely expected that the Fed will raise interest rates at least three times this year, Bank of America would be poised to benefit more than peers.”

“Meanwhile, Bank of America has estimated that an instantaneous 100 basis-point increase—which would be equivalent to roughly four hikes—would improve net interest income by $7.6 billion over 12 months,” they added.

Baird analysts seem to like the BAC stock, as well.

Analyst David George just upgraded BAC to neutral from underperform, with a price target of $42 a share. He believes the bank’s risk-reward is improving.

JP Morgan analyst Vivek Juneja raised the firm’s price target to $53.50 from $52.50, with an overweight rating. The analyst says higher interest rates will be a key driver of BAC earnings.

Dollar General (DG)

As oil prices gushed from about $90 to $130, Dollar General ran from about $185 to $222 – especially as more Americans become far more frugal.

In addition, as inflation pushes up the price of consumer goods, shoppers from all income levels are leaving regular grocery stores for dollar stores.

We can see that with the company’s strong outlook.

Dollar General expects net sales growth of about 10% for its current fiscal year. It also says EPS could grow between 12% and 14%.

“While we anticipate a challenging first quarter due to elevated cost pressures, ongoing supply-chain disruptions, and the prior year sales and gross margin comparison, both of which were positively impacted by stimulus payments, we are confident in our full-year plan, including our outlook for sales and EPS growth,” said John Garratt, chief financial officer.

Helping, BMO Capital just raised its price target to $265 from $250 thanks to strong earnings. Deutsche Bank raised its target to $242 from $230, with a buy rating. Wells Fargo also raised its target price from $220 to $255.

Even better, Dollar General just increased its quarterly dividend by 31% to 55 cents a share. It also plans to buy back about $2.75 billion worth of stock this year.

Global X MLP & Energy Infrastructure ETF (MLPX)

One of the best ways to diversify and pay less is with an ETF, such as the Global X MLP & Energy Infrastructure ETF. With an expense ratio of 0.45%, the MPLX invests in MLPs and other energy infrastructure companies, which can lead to higher yields.

Some of the ETFs top holdings include TC Energy Corp., Williams Cos. Inc., Enbridge Inc;, Kinder Morgan, Oneok Inc., and Targa Resources to name a few.

Also consider this.

“Investing in midstream/MLP has various advantages in inflationary periods. Energy infrastructure is well-positioned for the current inflationary environment, benefitting from its inherent real asset exposure and contract provisions that allow for annual inflation adjustments. For investors, dividend growth from the space can help offset the negative impact of inflation, according to Stacey Morris, director at Alerian, as quoted by ETFDB.com.

Since the start of 2022, the MLPX ETF ran from a low of about $34.94 to a high of $42.56. It may have the potential to gush even higher moving forward.

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