One group of companies that has the potential to profit is the food companies that have strong brand names. Kellogg’s, for instance, has faced extraordinary commodity cost increases in the price of wheat and other raw goods. Yet, the company recently cut the size of six of their cereals, in effect raising prices for consumers for the second time this year. If and when input costs fall for the firm, it will still have the higher price basis, pocketing the difference for the bottom line. Of course, there is no guarantee this will happen – just, perhaps, a higher probability than if you were buying shares of stock in a company that didn’t have the ability to raise prices to consumers. In an uncertain world, that’s probably the best for which you can hope.
These types of companies are particularly appealing to be held in tax-advantaged accounts such as a Roth IRA, Traditional IRA, SEP-IRA, or 401k because they tend to be large, mature businesses and therefore pay out a substantial portion of profits in the form of cash dividends. By sheltering them in these kinds of accounts, more money can be reinvested to purchase more shares because you aren’t forced to send a portion to the IRS each time a company distributes money to its stockholders.
For more information on inflation, take a moment to read about how to gauge the market’s expectation for inflation by looking at the spread between Treasury bonds and TIPs, and the five components of an investor’s required rate of return, and create backup income sources to protect yourself from inflation and recession.
