Higher inflation has been sticking around a lot longer than many expected. Instead of continuing to fall toward the Federal Reserve's 2% target, the latest inflation reading (as measured by the Consumer Price Index, or CPI) showed prices rising 3.5% year over year. That accelerated from the previous pace and exceeded market expectations.
While sticky inflation is bad for consumers and other parts of the economy, there are some beneficiaries. W.P. Carey (WPC 0.93%), Federal Agricultural Mortgage Corporation (AGM 0.69%), and SoFi Technologies (SOFI -1.70%) stand out to a few Fool.com contributors for their ability to capitalize on sticky inflation. Here's why they think these stocks are great buys for investors looking for ways to profit from surging inflation.
Inflation-driven rent growth
Matt DiLallo (W.P. Carey): W.P. Carey owns a diversified commercial real estate portfolio. The real estate investment trust (REIT) primarily focuses on owning single-tenant industrial, warehouse, and retail properties under long-term net leases with built-in rent escalations. The majority tie rent to inflation, with 38% uncapped CPI and 18% capped CPI, and most of the rest escalating rents at a fixed annual rate of 41%. Those leases supply it with very stable cash flow to support its high-yielding dividend, which was recently over 6%.
Elevated inflation in recent years has helped drive faster rent growth for the REIT:
Image source: W.P. Carey.
Sticky inflation has enabled the company to capture higher rental growth rates on its CPI-linked leases, which should continue in the near term. In addition, continued elevated inflation will also benefit the company as it signs new leases with fixed annual rental escalation clauses because it should be able to secure a higher growth rate. For example, last year, it completed a $468 million sale-leaseback transaction with Apotex, covering 11 properties across four pharmaceutical R&D and manufacturing campuses in Canada. The 20-year lease features 3% fixed annual rent escalations over the 20-year term.
Inflation driven rent growth will steadily drive W.P. Carey's cash flow higher. In addition, the company's earnings should get a boost as it continues to acquire properties that supply it with regularly rising income, like the Apotex transaction. Those drivers should enable the company to grow its dividend at an inflation-beating rate in the future.
25% annual dividend growth from farm 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 probably haven't heard of Federal Agricultural Mortgage Corporation, also known as Farmer Mac. The business is a government services entity whose mandate is to provide availability and affordability of credit for American farmers and rural communities 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 they both collapsed in the Great Recession. That said, Farmer Mac's lending criteria and borrower demographics are much more conservative than the excesses of the 2005-2007 housing market. For example, Farmer Mac's loan-to-asset value for purchased mortgages is 40%-45%, compared with 75%-80% for home mortgages Fannie Mae purchases. Also, its cumulative loan losses have averaged only 0.1% since Farmer Mac was created in the 1980s.
Conservative underwriting and low defaults mean it generates a lot of excess cash. Since it has a government mandate, it can't pursue other lending areas without an act of Congress. Therefore, it returns substantially all of its profits to investors through dividends. Over the past decade, it has grown its payout 24% annually.
AGM Dividend data by YCharts
Investors will be hard-pressed to find another stock with such strong dividend growth supported by a business as conservative as Farmer Mac. If you want to offset inflation, few companies can do it better.
Appealing to the inflation-squeezed
Jason Hall (SoFi Technologies): Banking has been both set to profit and put at risk to suffer from inflation. High inflation was the primary reason the Federal Reserve has increased interest rates from record lows to multidecade highs over the past couple of years. For banks, higher rates means they can earn more yield from loans they issue, but it has also caused lending activity to slow down a lot. It also has put more pressure on consumers, risking an economic slowdown that would be decidedly bad for banks since it means more people defaulting on loans.
But SoFi is built for this moment. As one of the best online-only banks, it doesn't have the expense of physical branches, and as a relatively new entrant to banking, it also doesn't have a big portfolio of low-yield loans weighing on its returns. So it has been able to pay much higher yields to depositors than legacy banking giants. This has resulted in very fast growth. In 2023 it increased its member count by an astounding 44%, more than doubled the cash on its balance sheet, increased deposits by 156%, and grew its loan portfolio almost 70%.
Simply put, it's attracting a lot of depositors looking to capture higher yield, and it's then turning that cash into high-yield loans that make it money. Despite offering more than 4% yield on deposits, SoFi earned a net interest margin -- the spread between what it pays on deposits and borrowings and what it earns from lending -- of 5.88% in 2023.
With exceptional service and attractive yields, SoFi is set to continue growing as more banking moves online, and it continues expanding the services it offers. With shares down 25% this year despite announcing high expectations for a strong 2024, now looks like a great time to buy shares of SoFi.
