Inflation continues to creep higher. Meanwhile, tariffs are here, and more are on the way.
Vanilla investors are rattled. The AAII (American Association of Individual Investors) Investor Sentiment Survey reveals 47% bears and only 28% bulls, its highest level of despair in a year.
Contrarians like us, meanwhile, are salivating. We like it when individual investors are down in the dumps. And it’s not just AAII members—CNN’s Fear and Greed Index has been floundering in fear territory for the last month:
Inflation fears? Tariff worries? Bring ‘em on!
Let’s talk about inflation first. The basic spreadsheet jockeys are surprised—sad even—that the Fed may not be cutting rates at all this year.
We, contrarians, expected this. In fact, we discussed the likelihood that inflation was bottoming months ago.
Back in October, year-over-year price increases had just dropped to 2.4% and headline readers were fawning over the prospect of multiple rate cuts from the Fed in 2025.
But we careful contrarians warned that inflation would creep back. It has risen to 3% in the most recent Consumer Price Index (CPI) reading:
This rise looks scary, but hey, the vanilla types would feel better if they had bought the two energy stocks we recommended as hedges against inflation. Alerian MLP ETF (NYSE:AMLP) has gained 11% and paid two dividends since then. It has also rewarded investors with not one, but two payout hikes over those four months!
AMLP’s Staircase of Recent Divvie Hikes
Source: Income Calendar
Those who missed AMLP may have also skipped our number two inflation Buyback in October: natural gas producer EQT Corporation (NYSE:EQT), which has rallied 42% (good for 171% annualized!).
Our case for EQT (ST:EQTAB) was simple. Natural gas prices were in the tank and due to rally. A stubbornly strong economy would see to that.
To capitalize on the rally we chose EQT, the lowest-cost producer. Check out EQT’s “breakeven costs” compared with five of its profitable competitors below:
Source: EQT Q2 2024 earnings presentation
EQT makes money quickly when natural gas rallies. “The natty” was trading around $2.42/MMBtu back then and has zoomed 63% to $3.94 at writing! As usual, low prices cured low prices, forcing higher-cost producers to close their more expensive operations. The result? A nice cherry on top of our inflation-powered rally:
Fast Returns Up to 42%
My dividend-growth service Hidden Yields cherry-picked EQT. After a run like this EQT is now a hold in HY. (Subscribers, you have enjoyed 51% total returns as we let this winner run—nice!)
OK, enough about the past. Let’s turn our attention to a payout hiker that has not yet run higher. With inflation on the rise, it is tempting to look for more inflation-friendly plays like AMLP and EQT. But I think that trade has played out for now.
Enter tariffs. The 10-year Treasury yield has eased since tariffs have been unleashed. Why? The levies are a short-term headwind for growth.
Contrary to popular belief that tariffs are inflationary, a recent study shows otherwise. The Centre for Economic Policy Research found that tariffs do not boost inflation because rising prices require a hot economy—and a trade war does the opposite.
Bond investors agree. The 10-year yield has yet again turned lower under its “5% ceiling.” If tariffs were really inflationary, wouldn’t the bond market have freaked out and demanded higher yields? The opposite has happened:
Did Tariffs Cement the Top in Rates?
Rather than seek out inflation plays, we find better bargains with stocks subject to overblown tariff fears. Analog Devices (NASDAQ:ADI) looks attractive here. ADI creates and sells semiconductor chips, which are everywhere. The company supports industrial, automotive, consumer and communication applications. ADI connects the physical world with the digital world.
The company’s four US facilities give it a strong domestic manufacturing presence and nice flexibility to emphasize its American production if needed for political purposes.
As I write, ADI remains 9% below its July highs. Headline fretters have misjudged ADI’s tariff risks. The company flourished under Trump 1.0 and is set up for another potential triple-digit run.
ADI Returned 138% During Trump 1.0
This dividend grower, which has boosted its payout by 149% over the past decade, is selling off on tariff sizzle. Let’s prepare to feast on this bargain steak.
ADI is the type of tariff- and recession-resistant dividend stock we are buying for our Hidden Yields portfolio today. These positions are poised for 15%+ total returns for years to come, no matter what the stock market does next.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement."