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TSX Today: How to Prepare Your Portfolio for Stagflation

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It’s happening. The Bank of Canada announced this week that the Consumer Price Index rose 3.7% in July. That’s the largest jump in over a decade since May 2011. That jump is also way outside where the bank was hoping it would rise — between 1% and 3%. So, what does this mean for Motley Fool investors on the TSX today?

Watch for stagflation

If Motley Fool investors aren’t already aware, stagflation is when inflation occurs but the economy doesn’t improve or remains “stagnant.” This is a major issue. If inflation is rising and it’s costlier to buy essentials, but the economy doesn’t rebound as quickly as we want, then it will be impossible for consumers to spend as they did in 2020.

With the Delta variant continuing to strain economic recovery, this recent announcement of inflation will not be good for the TSX today. The main drivers of this change were gas prices going up and prices associated with home ownership. But food prices and consumer goods were also on the rise.

So, what can Motley Fool investors do? Prepare by investing. It might sound counterintuitive, but by finding stable stocks on the TSX today, you can certainly fight back inflation.

Do the math

If you want to fight back inflation, you need to first consider your numbers. Let’s say you want to beat back the 3.7% inflation. That would mean you want to make 3.7% of your income– or even higher — this year to cover it. That number is fairly easy to cover with returns alone. But let’s say your stocks don’t do so well. That would mean you want to find a stock that offers stable dividends instead, as these will continue to be paid even if shares go down.

So, let’s say you make $55,000 per year. That would mean you want to make at least $2,035 in income to fight off inflation. Let’s look at a stock that can do that on the TSX today.

Buy a Big Six bank

The Big Six banks have not only fared well after the pandemic but continue to climb. A top analyst choice as the economy tries to rebound has been Canadian Imperial Bank of Commerce (TSX:CM)(NYSE:CM). The bank’s revenue continues to beat analyst expectations. Shares are up 60% in the last year alone. In the last decade, it’s had a compound annual growth rate of 12.56%! That alone will almost quadruple what you would have to make to fight inflation.

But let’s say shares then stall. You still get access to a dividend yield of 3.92%! That again is higher than the 3.7% inflation. To create that $2,035 per year in dividends alone, you would need to invest $51,571.92 as of writing. If you’ve been investing in your TFSA since 2009, you may already have that amount available! Though, of course, you’ll want to invest in more than just one stock.

Bottom line

This is just an example of how dividend alone can help you fight inflation on the TSX today. However, returns are coming, and it’s unlikely we’ll see another major crash. By investing your income in strong, stable stocks like CIBC, you can create a passive-income stream that will help you sleep at night and fight inflation.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Amy Legate-Wolfe has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

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