Higher inflation has lasted much longer than many expected. Instead of falling further toward the Federal Reserve’s 2 percent target, recent inflation readings (measured by the Consumer Price Index, or CPI) showed prices rising 3.5 percent year-over-year. This accelerated from the previous pace and exceeded market expectations.
While persistent inflation is bad for consumers and other parts of the economy, there are some beneficiaries. WP Carey (NYSE:WPC), Federal Agricultural Mortgage Corporation (NYSE: Annual General Meeting)And SoFi Technologies (NASDAQ:SOFI) Some Fool.com contributors stand out for their ability to capitalize on stubborn inflation. That’s why they think these stocks are a good buy for investors looking for ways to profit from rising inflation.
Inflation-related rent growth
Matt DiLallo (WP Carey): WP Carey owns a diversified commercial real estate portfolio. The Real Estate Investment Trust (REIT) focuses primarily on the long-term ownership of single-tenant industrial, warehouse and retail properties Net Leases with built-in rent increases. The majority tie rent to inflation, 38% have no upper limit CPI and 18% capped CPI, and most others increased rents at a fixed annual rate of 41%. These leases provide the company with very stable cash flow to support its high-yielding dividend, which recently topped 6%.
Increased inflation in recent years has contributed to faster rental growth for the REIT:
Sustained inflation has enabled the company to achieve higher rental growth rates on its CPI-linked leases, which is expected to continue in the near term. In addition, the continued high inflation will also benefit the company as it enters into new leases with fixed annual rent increase clauses, as it can secure a higher growth rate. For example, a $468 million project was completed last year Sale-leaseback transaction with Apotex, covering 11 properties across four pharmaceutical R&D and manufacturing sites in Canada. The 20-year lease provides for a fixed annual rent increase of 3% over the 20-year term.
Inflation-related rental growth will steadily increase WP Carey’s cash flow. Additionally, the company’s earnings should increase as it continues to acquire properties that provide it with regular increasing revenue, such as the Apotex transaction. These drivers should allow the company to grow its dividend faster than inflation in the future.
25% annual dividend growth through agricultural loans? Yes, please
Tyler Crowe (Federal Agricultural Mortgage Corporation): Unless you’re a farmer or have tried to get a loan for rural electrification projects, you’ve probably never heard of the Federal Agricultural Mortgage Corporation, also known as Farmer Mac. The Company is a government services company whose mission is to provide American farmers and rural communities with the availability and affordability of credit by creating a secondary market for loans and securities. Think Fannie Mae or Freddie Mac, but only for farmers, ranchers and rural community development.
“It’s like Fannie and Freddie” doesn’t sound like a great pitch considering both collapsed in the Great Recession. However, Farmer Mac’s lending criteria and borrower demographics are much more conservative than the excesses of the 2005-2007 real estate market. For example, Farmer Mac’s loan-to-value ratio for purchased mortgages is 40-45%, compared to 75-80% for home mortgages purchased by Fannie Mae. Additionally, cumulative loan losses since Farmer Mac’s founding in the 1980s have averaged just 0.1%.
Conservative underwriting and low defaults generate a lot of excess cash. Because it has a government mandate, it cannot pursue other areas of credit without an order from Congress. Therefore, it essentially returns all of its profits to investors via dividends. Over the last decade, the company has increased its payout by 24% annually.
Investors will be hard-pressed to find another stock with such strong dividend growth, backed by a company as conservative as Farmer Mac. If you want to offset inflation, few companies can do it better.
An appeal to those who suffer from inflation
Jason Hall (SoFi Technologies): Banking is both for profit And Run the risk of suffering from inflation. High inflation has been the main reason the Federal Reserve has raised interest rates from record lows to multi-decade highs in recent years. For banks, higher interest rates mean they can earn more returns on the loans they make, but they have also caused lending to slow sharply. It will also increase pressure on consumers, leading to an economic downturn, which would have a clear negative impact on banks as more people default on their loans.
But SoFi is built for this moment. As one of the best online-only banks, it doesn’t incur physical branch costs, and as a relatively new entrant to banking, it doesn’t have a large portfolio of low-interest loans to weigh on its returns. Therefore, it was able to pay depositors much higher returns than the old banking giants. This has led to very rapid growth. In 2023, the company increased its membership by a staggering 44%, doubled the cash on its balance sheet, increased its deposits by 156%, and grew its loan portfolio by almost 70%.
Simply put, it attracts a lot of depositors who want to earn higher returns and then converts that money into high-interest loans that turn it into money. Despite offering a deposit yield of more than 4%, SoFi achieved a net interest margin — the spread between what it pays on deposits and loans and what it earns from lending — of 5.88% in 2023.
With exceptional service and attractive returns, SoFi will continue to grow as more banking takes place online and continue to expand its range of services. With shares down 25% this year despite announcing high expectations for a strong 2024, now seems like a good time to buy SoFi shares.
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Jason Hall holds positions at SoFi Technologies. Matt DiLallo holds positions at WP Carey. Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool recommends WP Carey. The Motley Fool has a disclosure policy.
Stay on top of sticky inflation with these 3 money-making stocks. The book was originally published by The Motley Fool