Energy stocks’ revenues are inextricably linked to energy prices, which are a key component of inflation indices. As a result, when inflation rises, they have historically performed well. Equity REITs (real-estate investment trusts) may potentially be able to help offset the effects of rising inflation.
Is utility stock inflation beneficial?
Inflationary pressures can have a negative impact on stock prices. Utility stocks can give strong returns for investors looking for long-term, income-oriented investments. Inflation, on the other hand, can lead utility stock prices to fall over short periods of time.
Do utility stocks do well during a downturn?
Utility companies are an excellent defensive stock because of their recession-resistant character. Utilities rarely have a quarter with unexpected results, but they do tend to hold up well in rough markets.
Is now a good time to invest in utilities?
Residential, commercial, industrial, and government customers receive electricity, natural gas, and water and wastewater services from utilities.
Utility stocks are generally considered to be safe investments. Even during a recession, demand for utility services tends to stay stable. Meanwhile, the fees they charge for providing these services are either regulated (by a government agency) or contractually guaranteed (nonregulated). As a result, utilities generate consistent earnings, allowing them to pay dividends with above-average returns.
Utility companies are lower-risk investments because of their predictable profitability and income creation. As a reason, they’re frequently good choices for retirement income plans.
Utility stocks, on the other hand, do not all provide attractive investment returns. Additional distinguishing traits of the finest utilities offer them the ability to outperform. With that in mind, here are some of the best utility stocks to buy and what to look for when investing in utilities.
How can I plan for inflation in 2022?
With the consumer price index rising at a rate not seen in over 40 years in 2021, the investing challenge for 2022 is generating meaningful profits in the face of very high inflation. Real estate, commodities, and consumer cyclical equities are all traditional inflation-resistant assets. Others, like as tourism, semiconductors, and infrastructure-related investments, may do well during this inflationary cycle as a result of the pandemic’s special circumstances. Cash, bonds, and growth stocks, on the other hand, look to be less appealing in today’s market.
Do you want to learn more about diversifying your investing portfolio? Contact a financial advisor right away.
How do you protect yourself from inflation?
If rising inflation persists, it will almost certainly lead to higher interest rates, therefore investors should think about how to effectively position their portfolios if this happens. Despite enormous budget deficits and cheap interest rates, the economy spent much of the 2010s without high sustained inflation.
If you expect inflation to continue, it may be a good time to borrow, as long as you can avoid being directly exposed to it. What is the explanation for this? You’re effectively repaying your loan with cheaper dollars in the future if you borrow at a fixed interest rate. It gets even better if you use certain types of debt to invest in assets like real estate that are anticipated to appreciate over time.
Here are some of the best inflation hedges you may use to reduce the impact of inflation.
TIPS
TIPS, or Treasury inflation-protected securities, are a good strategy to preserve your government bond investment if inflation is expected to accelerate. TIPS are U.S. government bonds that are indexed to inflation, which means that if inflation rises (or falls), so will the effective interest rate paid on them.
TIPS bonds are issued in maturities of 5, 10, and 30 years and pay interest every six months. They’re considered one of the safest investments in the world because they’re backed by the US federal government (just like other government debt).
Floating-rate bonds
Bonds typically have a fixed payment for the duration of the bond, making them vulnerable to inflation on the broad side. A floating rate bond, on the other hand, can help to reduce this effect by increasing the dividend in response to increases in interest rates induced by rising inflation.
ETFs or mutual funds, which often possess a diverse range of such bonds, are one way to purchase them. You’ll gain some diversity in addition to inflation protection, which means your portfolio may benefit from lower risk.
What do you do with cash when prices rise?
Maintaining cash in a CD or savings account is akin to keeping money in short-term bonds. Your funds are secure and easily accessible.
In addition, if rising inflation leads to increased interest rates, short-term bonds will fare better than long-term bonds. As a result, Lassus advises sticking to short- to intermediate-term bonds and avoiding anything long-term focused.
“Make sure your bonds or bond funds are shorter term,” she advises, “since they will be less affected if interest rates rise quickly.”
“Short-term bonds can also be reinvested at greater interest rates as they mature,” Arnott says.
In a worldwide recession, where should I put my money?
During a recession, a solid investing approach is to look for companies that are retaining strong balance sheets or stable business models despite the economic downturn. Utilities, basic consumer products conglomerates, and defense stocks are examples of these types of businesses. Investors frequently increase exposure to these groups in their portfolios in anticipation of declining economic conditions.
Are utility stocks too expensive?
Even if inflation falls, investors should be careful when it comes to utility valuations. Based on our median price/fair value estimate as of late December, we believe the industry is 4% overvalued. Utilities have a 20 percent higher average price/earnings multiple than the 10-year trailing average. After a warm start to the winter, fourth-quarter earnings could be disappointing. Overall, utilities stocks appear to be on track for a similar steady but lackluster performance in 2022 as they did in 2021.