Tuesday, May 27, 2014

#37 "Hedge" against price inflation by investing in staples you use.

From Investopedia: Definition of 'Hedge'

"Making an investment to reduce the risk of adverse price movements in an asset..."

People like to complain about gasoline prices. They also like to complain about bank fees.  And how about cell phone fees?  Yep, people keep complaining about phone fees.  Energy costs such as electricity generation and delivery, natural gas costs etcetera are generally going up over time... and yep, people sure do complain about them.  Every year all of these products and services increase their cost to consumers like clockwork, sometimes around the rate of inflation and sometimes higher such as in the case of finite resources such as oil and gas.  If the cost of these items is expected to go up over time, and its reasonable to expect that businesses will pass on the cost of these items to customers so that companies can preserve profits, is there a way to either hedge against their price increase or to participate in the increasing value of these consumables?  There sure is!  Buying good companies that produce products or services that people use everyday is a good way to participate in the market.  It is also a way to hedge against rising prices of the products and services they sell.  A good example of this is participating in increasing gasoline prices by investing in Oil and Gas stocks.  We like to focus on companies that pay and increase their dividends over time.  This way when the price of gasoline goes up, we are able to participate in the increase through the accompanying dividend increases.  As the price of gasoline goes up, it costs me more money to fill up the tank of my car... but I also profit from the rising price of the oil and gas stocks that I own.  This is my hedge against price inflation.

The everyday costs/staples that we consume are gasoline, mortgage payments, insurance, phone plan, internet plan, electricity, heating fuel etc... so to hedge these costs we own shares in Oil and Gas companies, Banks, Insurance companies, A Phone and Internet company, Electricity Generation and Delivery companies.  All of the companies pay me a dividend and they all have raised them at or above the rate that they increase prices on their products or services that I buy.

So while some people have a tendency to do nothing but complain about higher prices year after year, we've taken a different approach.  We participate in the higher prices and higher profits through stock ownership.  Since we've been doing this for nearly 15 years now - and the dividend increases have outpaced inflation - many of our bills are now paid for by the cash-flow of the stocks we hold in their specific sectors.... such as our oil stocks now actually pay for our gasoline purchases, our phone company stock pays for our monthly cell phone costs and so on.

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