Wednesday, October 27, 2010

Looking Beyond TIPS

On Monday, Treasury Inflation Protected Securities (TIPS) were auctioned for the first time at a negative yield. This means that the Treasury note will only have a positive return if consumer prices jump up more than half a percentage point. TIPS are a way to hedge against inflation because the Treasury securities' par values are indexed to the Consumer Price Index (CPI). With this, you are getting a low risk investment in the form of a Treasury security that also protects you from the ill effects of inflation.

Writing in The Wall Street Journal, Ben Levisohn notes that commodities, currencies and dividend stocks are three other investment areas that may protect you from inflation should the negative TIPS anomaly continue to play out.

I agree with the notion that dividend paying stocks are a good way to fight inflation and by buying a basket of them either individually or via an ETF, you're going to share in future dividend growth which will likely outpace inflation.

The best way to do this when building an individual basket is to buy dividend paying stocks of blue chip, consumer-related names. Basically, companies that make recession-resistant products such as food, personal care and medical items and the like, are all likely to continue to grow dividends faster than the inflation rate which will act as a natural hedge against inflation. Be careful not to put "too many eggs in one basket" and instead diversify around the basket of dividend paying stocks so as to spread out risk. Buying dividend paying stocks to hedge against inflation will likely prove to be a wis
e long-term investment as the potential for longer-term capital appreciation is there, as well.

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