Worried About Stagflation? Here’s How I’d Invest

Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN) is a dirt-cheap stock with a near-5% dividend yield to fight any inflation or stagflation.

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The TSX Index could get much rockier as we approach what could be a very scary Halloween for stocks. Indeed, the “s” word, stagflation, has been thrown around a few times by the talking heads on TV lately. While a horrific environment to be an investor, one should not treat such a worst-case outcome as the likeliest scenario. Undoubtedly, it was not easy to be an investor in the 1970s. With many anticipating a return of such an environment, with high inflation and meagre economic growth, markets could find themselves on wobbly legs into year-end.

Still, the first half of 2021 was incredible, so a bit of weakness into the back half of the year should not be viewed as anything less than natural. In fact, a slower pace and a continuation of this recent pullback may be perceived as healthier by long-term investors looking to build wealth not just over the next few weeks and months, but over decades.

Many of today’s investors have no idea what it was like to hold common stocks through the worst of the 1970s. Markets were under pressure, and the genie of inflation proved to be tough to put back into the bottle without triggering a bout of economic weakness. Could the stage be set for a repeat of the 1970s? And what happened to the so-called Roaring 20s era of prosperity?

Stagflation or prosperity? Turbulent 70s? Or roaring 20s?

As of right now, it’s tough to tell what’s ahead. The decade of the 2020s probably won’t be like the roaring 2020s or the inflation-plagued 1970s. Neither bullish nor bearish extreme seems likely. The likeliest scenario is probably somewhere in the middle, not as bearish as a 1970s environment, but not as prosperous as a roaring 2020s. Indeed, the COVID pandemic and the aftershock have few historical comparisons. As we move further into uncharted waters, investors would be wise to continue as planned with their investments without feeling the need to make rash decisions just because we hear more about the 1970s than the roaring 20s amid modest weakness in broader markets.

Over the next decade, odds are that the markets will continue trending higher. It won’t be a smooth ride, but it’s likely to reward long-term thinkers with far greater returns than cash or bonds at these low-rate levels. While it is wise to have a defensive foundation in your portfolio consisting of primarily value stocks to avoid feeling the brunt of the damage as rates bounce off the floor, one should not feel the need to rush to the exits and hoard cash, especially given inflation could persist for many more quarters to come. As an investor, there’s pressure on cash hoarders as there is on holders in common stocks. To balance risks, one must find an allocation that’s right for them and stick with it, regardless of near-term price movements or noticeable sentiment shifts made by market strategists or other pundits.

Algonquin: A cheap Canadian stock to buy here

Algonquin Power & Utilities (TSX:AQN)(NYSE:AQN) continues to be one of my favourite plays this October to grow wealth over the long run and defend against inflation in the 4-6% range, however long it may last. The utility and renewable energy company fell under pressure over the past few months, retreating all the way back to fresh, new 52-week lows. The dividend yields 4.8% and can help investors can their purchasing power above water as they wait for the tides to turn back in Algonquin’s favour.

The company faces challenges, but the long-term secular trend toward green power is still on its side. In due time, I think AQN stock will regain its footing, perhaps on the back of a continuation of the growth-to-value rotation we’ve witnessed intermittently through this year. At 12.9 times trailing earnings, Algonquin is a cheap stock that one can feel comfortable buying, regardless of whether a repeat of the 1979s or 1920s is up ahead.

At the end of the day, investing is about finding businesses priced below their worth. And Algonquin, I believe, trades at a nice discount.

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 Joey Frenette 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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