Welcome to my latest video presentation. With me today is my guest, Austin Graff.

Austin is portfolio manager for TrueMark Investments, a provider of exchange-traded funds (ETFs) targeted for various investment needs. He specializes in dividend investments that are designed to combat inflation.

Below is a condensed transcript of our discussion. My questions are in bold. The video provides charts and additional details.

The latest CPI and PPI data show that inflation is running uncomfortably hot. However, we see glimmers of hope that perhaps inflation is decelerating. What’s your view?

It appears that inflation is slowing, but it’s a bit of a mixed bag. We expect a plateau from here, but we don’t expect a significant deceleration anytime soon. As we interview company managers, we’re hearing that the price increases have only just begun.

Many companies plan to continue increasing prices throughout the remainder of the year, and we expect that trend to extend throughout 2022 and into 2023, as long as customers are willing to pay. That should lead to some stickiness with inflation, rather than inflation just falling off a cliff, as some have expected.

Has the Federal Reserve blundered by reacting too late to rising inflation?

That’s a good question. It’s hard to tell in the moment. We likely won’t know if the Fed made a blunder until some point in the future.

The Fed makes decisions based on historical data, so it’s difficult for the central bank to make quality decisions in a dynamic environment like the one we are in right now. It does appear, though, that the Fed has blundered, just by waiting so long to effect its dual mandate.

Do you expect inflation to start falling at some point this year, or will it hover at elevated levels a lot longer?

I expect inflation to plateau and maybe slowly decline back to something closer to normal, but I don’t see us getting near the 2% target in 2022.

Other factors are keeping natural resource prices elevated, such as supply constraints caused by China’s COVID lockdowns and the Russia-Ukraine war.

Some analysts are predicting that Fed tightening will tip the economy into a recession, if not this year then sometime in 2023. Do you agree, or are you more optimistic?

The chances of a recession is a topic that analysts love to debate on television, but it’s actually hard to determine. I think in general a recession is coming because the economy is running really hot; it’s hard for prices to stay this elevated for a long time without something bad happening. I just don’t know when it will happen.

There’s likely still some runway given the amount of liquidity on the balance sheets of consumers and companies which may push things out further, but current rates of inflation are eating through that liquidity pretty quickly. The best stance for investors is to be prepared for a recession because they’re hard to call in advance.

What specific inflation hedges should investors consider right now?

Commodities and dividend-paying companies are the best inflation hedges in the current market. Commodities have a lot of runway because the supply/demand equation is out of whack.

Dividend-paying companies historically perform well in inflationary environments because they tend to have pricing power, allowing them to increase earnings and ultimately grow their dividends with inflation.

You’re an advocate of dividend stocks, as wealth-building tools but also as inflation hedges. Explain your reasoning.

Dividend-paying stocks have been a wealth builder for decades as these stocks typically have solid fundamentals that grow with the broader economy.

As referenced before, many of these companies are more mature free cash flow generators that have good pricing power, which allows them to increase their dividends at or above inflationary rates. Whether you are using the dividends to support your lifestyle or reinvest in the market, this should be considered a good quality in an inflationary environment.

As a portfolio manager, what are the key criteria that you look for in a dividend stock?

I focus first on the quality of the business and make sure that companies are run by quality management teams that are able to navigate various business environments.

You want to own companies with management teams that are committed to paying a dividend and growing it over time. Once you find quality dividend payers, you need to make sure the company has the ability to keep paying.

To determine these factors, you need to evaluate how they generate free cash flow and whether you expect that cash flow to continue or expand in the future. You also want to make sure they have plenty of cash flow to cover the current dividend. Finally, you want to make sure the company is reasonably priced.

Editor’s Note: Austin Graff just discussed the role that dividend stocks can play in hedging against inflation. But you need to pick the right dividend stocks, with dividends that are not only high but also sustainable. For our list of rock-solid dividend stocks that will generate steady income for years to come, click here now.

Subscribe to John’s video channel: