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Inflation stocks

Find out what stocks do well with inflation so that you can reduce its negative impacts on your portfolio.

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If you’ve spent money or watched the news in 2022, you’ve probably noticed that inflation is skyrocketing. Prices for housing, consumer goods and daily essentials are increasing at their fastest rate since the early 1980s. At the same time, the Bank of Canada is increasing interest rates in an attempt to bring down prices.

All of this has implications for your investments. Find out which stocks and sectors are impacted by rising inflation, and learn more about the best inflation stocks to buy in 2022.

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Best stocks for inflation divided by sector

1. Energy sector

Energy companies benefit from high inflation because it leads to high prices for commodities such as oil, gas and even renewable energy. As consumers pay more for energy, this influx of cash drives share prices up for energy companies. This is why energy stocks are one of the best stocks for inflation.

Stock pick: EOG Resources Inc. (EOG)

  • Market cap: $70.62 billion
  • P/E ratio: 15.10
  • YTD performance: +35.70%
  • 1 year performance: +66.20%
  • 5 year performance: N/A
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ETF pick: First Trust Natural Gas ETF (FCG)

  • Market cap: N/A
  • P/E ratio: N/A
  • YTD performance: +46.59%
  • 1 year performance: +113.37%
  • 5 year performance: +2.06%
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Finder’s top picks for Canadian oil and gas stocks

2. Financial sector

Financial institutions perform well when interest rates go up. As the Bank of Canada raises interest rates to counter rising inflation, banks and other financial institutions can benefit from a higher return on borrowed money. This is why financial sector stocks can be some of the best inflation stocks to buy.

Stock pick: Upstart Holdings (UPST)

  • Market cap: $7.4 billion
  • P/E ratio: 59.5
  • YTD performance: -45.11%
  • 1 year performance: -24.77%
  • 5 year performance: N/A
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ETF pick: Financial Select Sector SPDR Fund (XLF)

  • Market cap: N/A
  • P/E ratio: 3.84
  • YTD performance: -3.04%
  • 1 year performance: +9.18%
  • 5 year performance: +15.32%
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Finder’s top picks for Canadian bank stocks

3. Real estate sector

Real estate investment trusts (REITS) can be some of the best stocks for inflation. These trusts are companies that own or operate properties such as apartment buildings, office spaces, shopping malls and warehouses. As housing costs rise due to inflation, these companies can increase rents and pay out higher dividends to their shareholders.

Stock pick: Bluerock Residential Growth REIT (BRG)

  • Market cap: $947.49 million
  • P/E ratio: 113.44
  • YTD performance: +0.69%
  • 1 year performance: +162.82%
  • 5 year performance: +109.06%
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ETF pick: Vanguard Real Estate Index Fund ETF (VNQ)

  • Market cap: N/A
  • P/E ratio: N/A
  • YTD performance: -5.77%
  • 1 year performance: +20.08%
  • 5 Year performance: +7.79%
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8 REIT stocks to watch

4. Consumer staples sector

Companies in the consumer staples sector produce or sell goods or services that are always in demand. These can include products such as food, drinks, household goods, hygiene products, alcohol and tobacco. These companies represent some of the best stocks for inflation because they can increase their prices during inflationary periods and still make a high volume of sales.

Stock pick: Coca-Cola (KO)

  • Market cap: $269.46 billion
  • P/E ratio: 27.41
  • YTD performance: +4.15%
  • 1 year performance: +16.99%
  • 5 year performance: +77.67%
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ETF pick: Consumer Staples Select Sector SPDR Fund (XLP)

  • Market cap: N/A
  • P/E ratio: 3.84
  • YTD performance: +2.11%
  • 1 year performance: +13.74%
  • 5 year performance: +9.09%
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What to know about investing in consumer staples stocks

How does inflation affect stocks in Canada?

Inflation can cause stock prices to go up or down, depending on the industry. Stocks that are positively affected by rising inflation are usually for products and services that people need to buy despite high prices (such as housing, utilities and food). The sectors that tend to suffer are those that are non-essential and lose money as consumers reign in spending.

How inflation affects interest rates in Canada

The Bank of Canada increases interest rates to try to reduce inflation. Higher interest rates encourage Canadians to save money instead of borrowing and spending money (which drives up prices). As consumers spend less, companies have to lower their prices or at least raise them more slowly to encourage demand.

What stocks do well with inflation, and which do poorly?

Stocks that do well with inflationStocks that do poorly with inflation
  • Energy
  • Utilities
  • Financial companies
  • Real estate investment trusts
  • Consumer staples
  • Emerging markets
  • Technology
  • Telecoms
  • Transportation
  • Consumer discretionary (non-essentials)
  • Emerging market fixed income
  • Investment grade fixed income

What is causing inflation in Canada?

Inflation is happening in Canada for a number of reasons. Here are a few of the core ones:

  1. Supply chain issues. COVID-19 and the war in Ukraine have caused labour shortages, supply shortages and shipping constraints in many industries. When products and services are harder to get, people are willing to pay more for them, which drives the price up.
  2. Increased demand. As the economy opens up, there is an increase in demand for goods and services which are in short supply, driving up prices across the board.
  3. Labour shortages. The pandemic has resulted in labour shortages for key services and industries. These shortages are driving up wages, an expense that is often passed on to consumers through higher prices for goods and services.
  4. Reduced output of resources. There is reduced output for some products such as wheat and gas due to factors like climate change and global conflict. This is driving up prices for certain types of goods which are in shorter supply than usual.

Level of inflation by provinceCanada Inflation Map

What about dividend stocks?

Dividend stocks are seen as a strong strategy to protect against inflation since they pay out profits right away and they tend to offer higher returns than guaranteed investment certificates (GICs), bonds or term deposits. You may also get preferential tax treatment by investing in dividends when compared with interest income from other types of investments.

Just be aware that dividend-paying inflation stocks carry more risk than GICs, bonds or term deposits. Companies can unexpectedly cut dividends to shareholders if they need to infuse cash into the business to keep it afloat, and you may end up with less in your pocket as a result.

Find out more about how dividend stocks work

Bottom Line

  • Inflation is growing across Canada, and interest rates are going up at the same time.
  • Some stocks perform well with inflation while others should be avoided. The best stocks for inflation are in sectors such as energy, utilities, real estate and consumer goods.
  • Aside from sector-specific stocks, dividend stocks can be used to counter inflation.

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