Investing During Inflation
Income Investing in a rising interest rate environment
The return of inflation. It is a hot topic these days. Especially in a community such as Parksville/Qualicum Beach where we have such a high proportion of retirees.
But while inflation has spiked in recent months, it would be technically innacurate to refer to this as a return of inflation. Inflation has been with us for many years. In fact, Canada’s last negative CPI was in 1952 – 70 years ago.
The truth is, inflation is one of the main reasons we invest in the first place – to maintain the purchasing power of our money. So when inflation is high, really it is just that much more important to invest. Cash will lose value over time in terms of its purchasing power.
What to invest in? Well that is another story. Some types of investments are better suited than others for periods of higher inflation.
Ideally you want your investments to generate income that will grow over time. That is how you keep pace with inflation. For that the stock market is an option. Not necessarily for all of your money, but at least for a part of it. Why? Because successful companies will pay you for being a shareholder. They do this through dividends, which is essentially a portion of their profits. And since good companies tend to grow over time, so do their dividends.
A word of caution: Not all stocks are created equal. There is no guarantee a company will increase its dividend over time. Some might reduce or eliminate their dividends when business is slow. Some don’t pay dividends at all. And sometimes, stocks can even go down in value. That doesn’t help with inflation!
But through diversification and prudent investment selection, a portfolio can be created with a high probability of success. Here are a few tips:
- Include some safe fixed income investments in your portfolio, such as GICs or bonds. While they do not necessarily keep up with inflation, they do provide stability, as well as a source of funds.
- When buying stocks, avoid chasing after the hot investment themes of the day. Better to be a bit boring when buying stocks.
- Diversify, but not too much. Fifteen or twenty stocks mixed in with some fixed income investments is generally enough. Too many stocks can mean compromise in terms of the quality of the underlying companies.
- Avoid focusing too much on the percentage that an investment yields. It is nice to see a high yield, but it is not always a good sign. It can imply a lack of confidence on the part of investors in the company. Personally I see dividend growth as a more important consideration. Look for companies with a history of increasing their dividends over time. Again, this is a good way to keep pace with inflation.
- Look at payout ratios – how much of its profits the company pays out in dividends. To appease investors, companies sometimes pay out too much. Ideally a company will reinvest at least a portion of its profits to fund future growth. Not only can this lead to future dividend growth, it can also lead to a higher share price, which is a bonus!
- Consider a company’s free cash flow, which makes dividend payments easier.
At Grant Investments of Raymond James, income investing involving dividend-paying stocks, bonds, and other fixed-income investments is one of our areas of expertise. We have created customized portfolios with the goal of keeping up with inflation while minimizing risk. We work with investors in the Parksville/Qualicum Beach community and beyond to ensure their financial goals are met efficiently and consistently.
Representing the Raymond James Private Investment Management Group, my team and I offer an exceptional wealth management service that can benefit individuals looking for quality retirement planning, estate planning, and wealth management services.
Information in this article is from sources believed to be reliable; however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, Jim Grant , and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision.
Raymond James Ltd. is a Member Canadian Investor Protection Fund.