By Elizabeth O'Brien
Soaring tomato prices may be making your pizza costlier, but it's hardly the only inflation bite out of your wallet. If you haven't built a portfolio to hedge against higher inflation, now is the time.
Spiking energy prices have pushed inflation to a three-year high of 3.8%. Investors expect price pressures related to the Iran war to ease -- one reason the stock market keeps chugging along. But core inflation is creeping up and Treasury yields are rising as investors price in higher inflation expectations over the next few years.
Retirees who collect Social Security should get a bigger raise next year. Before the Iran war, the 2027 cost of living adjustment, or COLA, was projected to be 1.2%, according to Mary Johnson, an independent analyst with a long record of accurately predicting COLAs. Based on the latest data, she now estimates it will be 4.2%. The Social Security Administration will announce the 2027 COLA in October.
While 4% may sound adequate, the COLA rarely goes far enough to cover higher spending on essentials like gas, food, and healthcare. For a fighting chance of keeping up with inflation, you need investments.
Mark McCarron, chief investment officer at Wescott Financial Advisory in Philadelphia, likes sectors that can raise prices along with inflation, such as utilities and real estate. The State Street Utilities Select Sector SPDR exchange-traded fund, for instance, yields 2.7% and is up 7% this year on a total return basis.
For real estate, McCarron likes the Dimensional Global Real Estate ETF. The value-oriented fund yields 3.8% and has outperformed the U.S. real estate sector in the past year, partly thanks to its international tilt.
For individual stocks, look for dividend stalwarts -- companies with ample cash flows to fund and hike their payouts. And avoid companies that may have to issue more debt or stock, says Tim Pagliara, chief investment officer at CapWealth in Franklin, Tenn. "A company that has to go to the capital markets is a risk for retirees," he says.
Dividend payers he likes include Gilead Sciences and CVS Health. The stocks yield 2.4% to 2.8%, respectively, which isn't much, but their total return potential -- dividends plus price gains -- is still comfortably ahead of a 10-year Treasury, he says. CVS just had a big earnings beat, while Gilead has a robust drug pipeline, Pagliara says.
Bonds are a bedrock for retirees' portfolio income, and yields have crept up, making them more attractive. The 10-year Treasury note currently yields 4.5%, up from 4% a few months ago. The two-year T-bill yields 4%.
The Federal Reserve's incoming chair, Kevin Warsh, is under pressure from the president to cut interest rates, but that will be tougher now. Futures markets even see a 31% chance that the Fed will raise its benchmark rate by the end of the year to combat inflation.
When yields rise, bond prices fall, lowering the value of a bondholder's existing holdings. Individual bonds held to maturity don't lose value.
Retirees should avoid accidentally taking on too much risk in long-term bonds, says Pam Krueger, founder and CEO of Wealthramp, a service that connects people with fee-only advisors. Shorter-term bonds tend to be steadier but pay less, she says, while longer-term bonds usually offer more income but fluctuate more when rates move.
McCarron sees the sweet spot in shorter-maturity bonds which yield a bit more than money markets or cash-equivalent T-bills. "Cash won't keep pace with 3.5% inflation," he says. One of his mutual fund picks, Vanguard Short-Term Investment-Grade, yields 4.3%
For retirees in high tax brackets, a municipal bond fund may be a better bet, generating higher tax-adjusted income. An ETF McCarron uses is Vanguard Short-Term Tax-Exempt Bond. It yields 2.6%.
Treasury inflation-protected securities, or TIPS, are designed to keep pace with inflation. But they are highly interest-rate sensitive and lost money in 2022 when the Fed hiked rates sharply.
As an alternative, consider Series I savings bonds. The notes are designed to keep pace with inflation, and their interest rate adjusts every six months based on the Consumer Price Index. They currently yield 4.26% through October.
Unlike TIPS, I-bonds don't throw off income; you have to wait until you cash in the bond or it matures to collect. If you don't need the money for living expenses, I-bonds can be a good way to generate income that inflation won't chisel away.
Write to Elizabeth O'Brien at elizabeth.obrien@barrons.com
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(END) Dow Jones Newswires
May 15, 2026 21:31 ET (01:31 GMT)
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