Stagflation is a scary word, especially for beginner investors who may not know what to expect. Stagflationary environments are quite rare, but when they hit, it can be perplexing. If anything, many think we’re already in the early innings of stagflation.
Stagflation entails sluggish economic growth and stubbornly high levels of inflation. In Canada and the U.S., inflation seems to have run out of control. Here in Canada, CPI came in at a red-hot 7.7%. And there’s no signs that it’s about to cool anytime soon. Not with the meagre rate hikes delivered by the Bank of Canada thus far.
Though economic growth remains robust, the recent quarter has shown a bit of fragility on the part of the consumer. Indeed, inflation can impact the way we spend our money. With recent layoffs in the tech sector, hiring freezes, and chatter of an imminent recession, a drastic economic contraction may end up becoming a self-fulfilling prophecy, as central banks pull the brakes.
2021 was a hot year for consumers and speculators. Nobody wants the party to end or for the Fed to take the punch bowl away. Though the party has ended, with investors expecting a very nasty hangover to ensue in the second half of 2022 and 2023, I’d argue that the markets have already had a chance to puke. And many investors may be feeling better after Friday’s big relief rally.
Stagflation: Should beginner investors brace their portfolios?
I have no idea if Friday’s bounce is the first of many to come. At this juncture, stagflation is a possibility, but it seems less likely, given inflation naturally tends to fall as economic growth plunges. If anything, stagflation should be viewed as a troubling moment in time. Such bad times never last.
For beginner investors, what’s the best way to grapple with high inflation and lower growth moving forward? I’d argue high-yield defensive stocks are the best way to go. Inflation is here, and it could drag on for another year. So, you’ll need a high-yield dividend to help ease the pressure on your purchasing power. At the same time, you’ll need operating cash flows that are resilient enough to hold once the economy falters.
Fortis (TSX:FTS)(NYSE:FTS) is one of my favourite Steady Eddie dividend stocks that can help new investors better prepare for any stagflationary storm. What if stagflation doesn’t happen either due to retreating inflation or resilient economic growth? Fortis stock is still capable of robust total returns, given its relatively modest multiple.
Fortis: A defensive dividend stock for stagflationary environments
At this juncture, Fortis is a bond proxy utility that we’re all probably familiar with. The stock is pretty much flat year to date, as broader markets fell into a correction. Undoubtedly, the firm’s remarkably resilient cash flow stream seems untouchable by the slowdown hit the world economy. With such a wide moat and a defensive business, it’s not a mystery as to why Fortis is a retiree mainstay.
It’s not just a retiree stock, though. It’s a great way to steady anyone’s portfolio for choppy times. The stock yields 3.6% and trades at 23.1 times trailing earnings. The price of admission has gone slightly higher, as investor rushed out of risk-on assets into more defensive plays. Still, for those lacking recession-resilient names, Fortis isn’t nearly as expensive as it could be if stagflation is, in fact, on the horizon.
