Over the course of the past year, I’ve had the opportunity to sit down with several financial advisers who emphatically assured me that they and their large, institutional employers see little evidence of inflation creeping up in the economy.

I beg to differ. So far, inflation seems to be poking up in high-end markets like luxury housing and high end art. It doesn’t seem to surprising to read that a Picasso that sold for X million a few years ago has just resold for X times 4. Or that upscale condos in New York and San Francisco are sometimes fetching upwards of $10,000 a square foot. (At least in Manhattan, it doesn’t seem like too many years ago when $1,000 per square foot seemed expensive.) But inflation in the luxury world, which might be something of a byproduct of the increasing concentration of wealth in the top 1% and above, likely will find a way to trickle down or spread out to effect the wider market. In Minneapolis, my hometown, housing prices have been increasing at an annualized rate of 10% for the last four years. First time home buyers are facing a shrinking market and rampant bidding wars. In just about every metropolitan area with a high several of desirability and a strong local economy, home values are growing at a pace that significantly exceeds income growth.

With a new tax law that is expected to significantly increase the national budget deficit, the government will be increasingly tempted to print more money pay its bills. Eventually, that inflationary pressure is going to show up in the check out line as well as in housing and luxury markets.

Why do I bring this up in a blog about investing for dividend income? Because higher inflation means higher interest rates, and that could pressure the stock prices of dividend paying stocks, especially those that have served as a refuge for income oriented investors who tired of low rates in the bond market. We’ll have to wait and see if my fear of rising inflation is justified, and time will tell how much pressure that put’s on stocks, but for the moment I’m treading cautiously as a stock market investor.

Having said that, this week I added a little to my holdings in General Mills (GIS). The stock has fallen considerably over the last couple of years, in part because of growing consumer preference for fresh foods. As Jim Cramer lamented some time ago, the company’s brands are “tired.” But recent acquisitions in the organic and pet food space may help the company reboot its growth potential. And, quite frankly, at about $43 a share General Mills makes a lot more sense than it did at its $72 peak a couple of years ago. I think further downside risk is limited, and turnaround potential is strong. So I’m buying for its 4.4% yield. And because I like to have my wallet back up my investment thesis, I’ll stock up on Cheerios and Yoplait as well.

 

 

• Uncategorized