7 Stocks to Protect Against the Massive Inflation Shock of 2023

Last year has proven to be one of the most challenging years for the U.S. economy. An inflation shock took hold, driving the annualized inflation rate from 1.4% in January 2021 to 7% to close out the year. Moreover, the recently released inflation data suggest that inflation will continue to weigh down the economy for the better half of 2023. Therefore, I wouldn’t blame investors for looking at some of the best stocks to buy to battle what could be yet another inflation shock this year.

Perhaps the best action for investors is to increase exposure to safer bets and diversify their holdings. The top sectors to invest in during periods of high inflation typically include real estate, energy, and commodities. You could throw in high-quality tech stocks that have held up well during economic downturns. Additionally, wagering on dividend stocks with a healthy track record of payouts won’t hurt either.

Let’s look at some of the best inflation stocks to buy, keeping the above in mind.

Enbridge (ENB)

Canada-based Enbridge (NYSE:ENB) is one of the most famous traditional energy stocks. The energy infrastructure giant operates oil and natural gas pipelines, transporting more than 25% of the total crude oil production in the North American region. Moreover, its fee-based business model has allowed the firm to build its colossal cash war chest of over $1.1 billion.

The firm benefitted from higher oil and gas prices for the better part of last year, helping it post double-digit top-line growth. Following the slowdown in energy prices, it stumbled in the third quarter of 2022, but returned to generating big bucks last quarter.

Moreover, it is among the highest dividend-yielding real asset stocks, offering an excellent 7% yield. On top of that, its stock trades at just 2-times forward sales estimates, roughly 16% lower than its 5-year average. The momentum in its stock price has slowed significantly of late, which points to an excellent opportunity to load up on this stock now.

Microsoft (MSFT)

Microsoft (NASDAQ:MSFT) remains one of the most popular tech businesses ever, and is arguably more relevant than ever. With its investments in AI behemoth ChatGPT, and its move to acquire video gaming giant Activision Blizzard (NASDAQ:ATVI), the firm is set to add new chapters to its impressive growth story. Additionally, the massive potential of these business moves hasn’t been fully priced-in, meaning I expect MSFT stock to continue to surge to new heights this year.

I believe that the incredible success story that is its Azure cloud division is often underappreciated. Revenues from the segment have grown at a double-digit rate over the past several quarters and have helped effectively balance the sluggishness of its other divisions.

Moreover, MSFT Stock has been a remarkable wealth compounder, generating over 750% returns in the past decade. Its record of shareholder wealth creation is as impressive as it gets, having returned over $26.5 billion via share buybacks in the past year alone.

Freeport-McMoRan (FCX)

Leading copper producer Freeport-McMoRan (NYSE:FCX) has taken investors on a turbulent ride over the past few years. Its ill-advised foray into the oil and gas sector in 2013 led to the stock shedding over 50% of its value. However, it has returned its attention to copper, establishing itself as the top producer in the niche. Also, the firm has made substantial contributions to the lucrative gold and molybdenum markets over the years.

Despite a challenging market, FCX stock has a tremendous wealth compounder, growing over 300% in value over the past three years. Additionally, hedge fund activity in the stock has remained remarkably consistent in the past nine quarters, a testament to the quality of the stock.

Johnson & Johnson (JNJ)

You don’t need to be a rocket scientist to understand why pharma giant Johnson & Johnson (NYSE:JNJ) features on my list of stocks to bet on for those worried about an extended inflation shock. Johnson & Johnson boasts a consistent track record of growing its top and bottom lines from its blockbuster lineup of drugs. More importantly, for investors, it’s paid a dividend in the past 60 consecutive years, no small feat.

If you’re looking for a wealth compounder, though, JNJ stock wouldn’t be your cup of tea. In its defense, the stock has offered a considerable 18% price return over the past five years. However, its strength lies in the stability of its business, having generated stellar profitability and cash flow growth over the past several years.

Despite the current inflationary pressures, JNJ stock has generated a trailing twelve-month free cash flow yield of over 20% and a return on equity of around 23.5%. Therefore, it represents an excellent hedge against inflation.

S&P 500 Dividend Aristocrats ETF (NOBL)

Picking individual stocks carries a significantly higher risk than investing in a diversified basket. Hence, for many investors, it may be more apt to wager on exchange-traded funds (ETFs).

The S&P 500 Dividend Aristocrats ETF (NYSEARCA:NOBL) is arguably one of the best-performing ETFs, offering exposure to 64 top-tier businesses with dividend aristocrat status. These companies have successfully grown their dividend payouts for at least 25 consecutive years. Additionally, NOBL stock has had an excellent record of increasing investor returns, offering a 5-year return of 58% compared to 17.2% (Median of all ETFs).

Naturally, these businesses aren’t speculative bets, as they have effectively increased earnings in line with inflation and other macroeconomic pressures. The companies held in this ETF have the potential to dampen the effect of inflation on their businesses by passing along higher costs to the consumer.

Prudential (PRU)

Prudential (NYSE:PRU) is an excellent choice for long-term investors, offering a healthy balance between stability and growth. With over 140 years in the insurance space, it has proven resilient in the face of multiple economic downturns, while expanding its reach to become one of the leading life insurers worldwide. Having operations in more than 40 countries gives Prudential the scale to spread their risk across multiple geographical markets.

Prudential boasts an excellent dividend portfolio offering a robust dividend yield of over 5%, with 14 consecutive years of payout growth. The company’s consistent payouts are supported by its rock-solid cash balance that continues to move from strength to strength.

Its cash position soared to $1.7 billion last year, representing a massive 51% bump from its balance in 2013. The firm’s substantial cash reserves allow it to benefit from higher interest rates, as it can invest the cash generated from premiums and annuities in fixed-income instruments.

Realty Income (O)

Like J&J, Realty Income (NYSE:O) boasts an exceptional track record of paying dividends for an extended period. The firm has raised monthly dividends for over 52 years, becoming a dividend aristocrat.

The popular real-estate investment trust operates one of the most consistent businesses in its niche. Much of its consistency concerns its business strategy, which revolved around purchasing properties and leasing them to tenants under long-term agreements. Consequently, its operating cash flows have grown steadily over the past several years. Moreover, its average-funds-from-operations growth has improved by 5.7% in the past three years, more than 100% higher than the sector average.

On the date of publication, Muslim Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.