Jeremy Siegel: What to Buy to Be Insulated From Inflation

Until recently, it has been good to be Jeremy Siegel, stalwart defender of equities. The S&P 500 finished 2021 with an advance of just under 27%. But the index is down 2.25% so far in the new year, including Thursday’s dip of 1.42%.

Nevertheless, Wharton School professor Siegel is making the case that stocks should weather the current inflationary spell fine, and that the best kind of stocks are the high dividend payers.

“Dividend stocks are protected against inflation because firms have been able to raise their prices, their cash flows, and increase their dividends,” Siegel said in a CNBC appearance.

The author of the classic book, Stocks for the Long Run, argued that even if interest rates go up, bond yields can’t rise sufficiently to offset inflation. “Why bother buying a bond paying 3.5% when inflation is 7%?” he said, referring to the latest Consumer Price Index (CPI) increase.

Never miss a story — sign up for CIO newsletters to stay up-to-date on the latest institutional investment industry news. 

So forget bonds, he said, even inflation-shielded ones. “You could go to TIPS at minus 1%” yield,” he said, in a reference to Treasury inflation-protected securities. “That’s not an answer.” On the other hand, “You have dividend-paying stocks at 2.5%, 3%, 3.5%, 4%—well-protected dividends that are rising, and you have capital gains.”

Siegel added that he could see the S&P 500 climbing to 5,100 this year (up 9.5% from now). “Stocks are the place to be,” he declared. The professor then cited the oft-used bull-market acronym, TINA, for “There Is No Alternative.”

To Siegel, inflation has a lot of momentum and will be around a lot longer than many on Wall Street believe. “Everything is pointing upward,” he said. “Oil is nearing an all-time high.”

To those who believe inflation will subside once supply-chain snarls are fixed, Siegel retorted that the nation’s money supply has expanded by a third since the March 2020 onset of the pandemic. “That’s way too much money chasing too few goods,” he said.

Numerous studies have shown that stocks benefit from moderate inflation—just not the double-digit kind prevalent in the 1970s. “Stocks are real assets,” he said, and thus best to offset CPI spirals.

He also contended that the oft-expected but seldom realized “rotation” into value stocks from growth will “have legs.” Value typically does better in inflationary times, than growth stocks.

The iShares S&P 500 Value exchange-traded fund (ETF) closed Thursday up 1.4% for the year, while its doppelganger, the iShares S&P 500 Growth ETF, is down 5.3%.