The 5 Best Inflation Stocks To Buy
Key Takeaways
☑️ Inflation is rapidly increasing – worldwide
☑️ Investors need to have a simple plan
☑️ 5 inflation stocks are presented offering shelter
☑️ These stocks work in good and bad times
The 5 Best Inflation Stocks To Buy In 2023
Below is a sample portfolio of five inflation stocks offering investors a well-balanced allocation in different industries.
| Sector | Company | Market Cap | Div % | ROIC % | FCF Yield % |
| Staples | PepsiCo | 224 B | 2.7 | 11.5 | 2.6 |
| Energy | Shell | 194 B | 2.9 | 10.9 | 17.3 |
| Utility | Enbridge | 76 B | 7.2 | 3.6 | 3.1 |
| Healthcare REIT | Welltower | 27 B | 4.1 | 2.3 | 4.8 |
| Precious Metals | Franco-Nevada | 24 B | 1.0 | 12.5 | 3.9 |
The above portfolio allocation gives you good diversification in terms of industries, but also in terms of geography. Shell for example produces oil/nat gas all over the world. Franco streams gold from operating mines globally. Welltower owns senior living properties in the U.S., Canada, and the U.K. PepsiCo generates 50% plus outside the U.S., etc.
Sectors To Consider During High/Low Inflation
There are certain sectors that investors should consider/avoid during times with high/low levels of inflation. Put simply, in times of low inflation, you can go further out on the risk curve (e.g. tech, digital assets, cyclical stocks, etc.), and in times of high inflation, defensive inflation stocks would be from sectors such as consumer staples, utilities, healthcare, etc.
Best Sectors For Three Levels Of Inflation
Another table shows a more broad allocation recommendation:
| Inflation Level | LOW (0 to 3%) | HIGH (3 to 5%) | HYPER (5% or higher) |
| Best sector(s) | Tech | Energy, Materials | Defensive Stocks, Utilities, Energy |
| Best commodities | Energy | Industrial Metals | Precious Metals |
Good sectors in low inflationary environments are usually Tech and more high-risk sectors. In times of high inflation, investors should consider moving into more defensive inflation stocks, such as consumer staples, utilities, energy, and REITs, especially healthcare REITs.
Inflation Heatmap Paints A Worrying Picture
Simply looking at Incrementum’s excellent inflation heatmap it is obvious that we are facing an environment we haven’t faced since the 1970s.
The inflation heatmap for emerging markets looks even scarier, as you have countries like Turkey and Argentina with inflation rates of +10%. If you feel like it, check out the price of gold measured in the Argentinian Peso.
What Are The Best Inflation Stocks?
Now that we have established the understanding that inflation is a real problem, worldwide, let’s look at the specific sectors and single inflation stocks that should offer us good protection from ever-increasing prices.
Inflation Stock #1 – PepsiCo / Consumer Staples
| Market Cap $ M | 223,394 |
| Enterprise Value $ M | 257,988 |
| PE | 24.40 |
My recommended consumer staples stock is PepsiCo (PEP). I have analyzed and reviewed the stock in detail, and I believe this dividend king should be in everyone’s income portfolio. As the second largest food and beverage company in the world, its revenues are 2x that of Coca-Cola. Its products are sold in 200+ countries. It creates higher revenues with food and snack products than with beverages (!). Its brand portfolio includes a wide range of enjoyable foods and beverages, such as Pepsi Cola, Gatorade, Lay’s, Quaker Oats, Doritos, Mountain Dew, and Cheetos.
PepsiCo has an excellent ROIC% of 11.5, a stable dividend of 2.7%, and produces free cash-flows yield of 6.3 Bio USD every single year. With that kind of money, you can buy all sorts of innovative and disruptive startups, invest in R&D, pay down debt, ensure the dividend, and so on.
I believe $PEP is an excellent consumer staple pick, that you can buy and hold forever.
Alternatives to consider: Procter & Gamble
Inflation Stock #2 – Shell / Energy
| Market Cap $ M | 189,721 |
| Enterprise Value $ M | 232,785 |
| PE | 6.28 |
My second recommendation is the Dutch/British energy giant Shell (SHEL). I believe Shell is the best oil company in the world. It generates gigantic amounts of free cashflow (35.8 Bio USD in 2021), invests massively in renewable energy, has a reasonable valuation, has a great geographic diversified portfolio of producing assets, and pays a good dividend without any withholding tax deducted, as it is headquartered in the U.K.
It currently boasts a margin of safety of 53% (!) and would benefit even more from increasing oil prices (which are very likely given the high amounts of geopolitical risks at the moment).
I am happy holding $SHEL in my All-Weather Portfolio, but it is also an excellent inflation stock to hold during times of high inflation.
Alternative to consider: Brookfield Renewable
Inflation Stock #3 – Enbridge / Utilities
| Market Cap $ M | 76,656 |
| Enterprise Value $ M | 138,743 |
| PE | 21.36 |
My recommended inflation stock number three is the Canadian midstream company, Enbridge (ENB). As much as 25% of all North American oil is transported on Enbridge’s infrastructure, also supplying 20% of the country’s natural gas.
Read a detailed review of the 8 best midstream stocks here.
What is noteworthy is that only 2% of its cash flow is sensitive to commodity prices, the rest being provided by long-term, volume-committed contracts. 95% of its long-term contracts are investment-grade.
The firm also has a growing renewables portfolio revolving mainly around onshore and offshore wind projects. Regardless of whether it’s natural gas to heat homes, or oil for gasoline and jet fuel, the company has its hand in transporting a significant amount of it across the entire continent. This makes Enbridge an excellent inflation stock to own, as it will have a reason to exist in any inflationary environment.
In 2021, it produced a free cash flow of 2.6 Bio USD and a net margin (meaning after tax) of 10.2%. It pays a quarterly dividend of 7% (!), which it grew aggressively.
I believe $ENB is an excellent inflation stock you can buy and hold forever, or till inflation is back under control.
Alternative to consider: EO.N
Inflation Stock #4 – Welltower / Healthcare REIT
| Market Cap $ M | 27,250 |
| Enterprise Value $ M | 42,791 |
| PE | 66.07 |
My recommended inflation stock number four is Welltower (WELL), in my point of view the best senior living REIT.
Welltower owns 1,800 in-place buildings in the United States, Canada, and the United Kingdom ranks 561 in the Fortune 1,000 (end of 2021), and is a component of the S&P 500. I hold Welltower in my All Weather Portfolio.
Welltower invests in real estate that it typically also operates, meaning it buys hard assets, that it also operates itself, making $WELL a perfect inflation stock and a good choice if you are looking for inflation protection. It has paid out a dividend for 30+ years.
In 2021, it generated 1.3 Bio USD in free cash flow and pays a dividend yield of 4.1%. After its recent decline in price (from 100 USD down to 60 USD, a 40% drop), I believe $WELL offers good inflation protection and is therefore a very good inflation stock to consider.
Alternative to consider: Omega Healthcare
Inflation Stock #5 – Franco Nevada / Precious Metals
| Market Cap $ M | 23,723 |
| Enterprise Value $ M | 23,628 |
| PE | 33.15 |
The fifth inflation stock I recommend is the largest gold royalty company in the world, Franco Nevada (FNV). I have written about how to build a portfolio of gold mining companies before, and $FNV is like the star on top of the Christmas tree🎄. It is the best of the best.
It generates 734 Mio USD in net income, with 42 employees in total. Yes, 42, not 42,000. On a Net Income per Employee basis, Apple, arguably one of the most profitable businesses ever created, does not even do 10% of what Franco does, see the side-by-side comparison table:
| Apple | Franco Nevada | |
| Net Income (2021) | 95 Bio USD | 0,73 Bio USD |
| Employees | 154,000 | 42 |
| Net Income/Employee | 0,6 Mio USD | 17,4 Mio USD |
What I further love about $FNV is the fact that besides precious metals it also has a large portion of its assets invested in oil and natural streaming agreements. The economic cycles of energy (oil & nat gas) and precious metals (gold & silver) are complimentary. To over-simplify we could say that one is doing well when the other isn’t. A wise move by the management!
Franco has hundreds of streams, meaning there is no cluster risk like with operators that own single assets. Should the price of precious metals go up, Franco will greatly benefit. Should prices remain where they are, or go down, Franco will do fine as its cost base/fixed costs won’t be impacted (again, only 42 employees!).
I own and hold $FNV in my All-Weather Portfolio for years, and will add to it whenever opportunities present themselves. I believe $FNV is an excellent inflation stock that investors can buy and hold during times of low and in particular during times of high inflation.
Alternative to consider: Wheaton Precious Metals
Conclusion
Please always do your own research, but the five presented inflation stocks above offer good protection during times of high inflation.
The portfolio offers an allocation of diverse sectors (consumer staples, energy, utilities, healthcare, and precious metals), and regions (U.S., Europe, and Asia) with good valuation, high dividends, and substantial free cash flows.
Age when reaching FI: 40 in 2018
Left the rat race: May 2017
Living in: Singapore
Number of kids: 2
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