Shopping for Inflation Hedges

Their latest report on the industry, published Sept. 27, reveals that between 1974 and the first quarter of 2011, REITs had positive total returns in 10 out of the 14 inflationary periods within that span.

And, during the six periods when inflation rose, REITs had an average annualized return of 10.7 percent, compared with 9.8 percent for stocks and 4.6 percent for bonds.

“U.S. REITs have outperformed stocks and bonds in periods of both rising and moderating inflation,” Cheigh and Bohjalian write, noting such securities have proven to be an “effective inflation hedge.” “In our view, this will hold true as the next cycle takes shape.”

Blue-Chip Stocks

Retirees looking to insulate their income against the effect of rising prices should continue to keep a portion of their portfolio invested in stocks—specifically, dividend-paying blue chips.

While higher on the risk scale than TIPS and other fixed-income securities, stocks are the only asset class that give you a fighting chanceof outrunning inflation.

“While not a direct hedge against inflation, if you’re looking for investments with the potential to outstrip inflation over time, or earn a better return over time, stocks have to be part of your portfolio,” says Morningstar's Benz.

Jeffrey Hirsch, president of the Stock Trader’s Almanac, agrees.

His latest book calls out a handful of top blue chip picks, those that have consistently increased their dividend for at least the last 10 years.

Among them: IBM, Abbott Laboratories, Nucor, McDonald’s, Pepsico and Wal-Mart Stores.

Several mutual funds, including Morningstar’s top pick Vanguard Dividend Growth Fund, do the screening for you—investing exclusively in companies with a history of dividend growth.

I-Bonds

Lastly, I-Bonds, or inflation-linked U.S. savings bonds, are another option for your inflation-fighting toolkit.

Interest on I-Bonds is paid in two ways—as both a fixed interest rate, set when you purchase the bond, and a variable rate, which changes twice a year based on the CPI.

Because the interest earned is paid out when you sell, however, you won’t collect an income stream during the years you own it. You won’t have to pay tax on the interest as it accrues either, of course, which is why Benz of Morningstar says I-Bonds are safe to hold in a taxable account outside of one’s retirement portfolio.

One downside: Investors are restricted to $10,000 per year per person, a drawback for large investors looking to use I-Bonds for inflation-fighting purposes.

For retirees, inflation can be an insidious thief.

An appropriate allocation to inflation fighting tools like TIPS, REITs, I-Bonds, and stocks can help ensure your savings keep pace with the cost of living.