As investors managing a global dividend fund, one of the most important things to us right now is the potential impact of stagflation on income investing.
We really must confess that we have no idea whether the notorious combination of sustained high inflation and low growth is back to stay or not.
Nor would we wish to try to add to the well-considered points on either side of the debate, except to say that we agree with those who believe it is simply too early in the recovery from the pandemic to tell.
We would, however, like to offer an opinion on which types of businesses are very likely the best income stocks for stagflation. Ours is not a conventional opinion, but from time to time this can be a rather good thing in investing.
Invest in the innovators
Above all, we believe that innovative businesses are the stocks to own for the years ahead. This is true for investors who require capital growth and it is just as true for investors who require income.
Moreover, it is especially true when considering a world of stagflation. Why? Well, stagflation is a very challenging economic environment, and we simply believe that innovative businesses are the most resilient and adaptable in the face of such a challenge.
This was the case during the pandemic, where innovators across the economy adapted their processes with great ingenuity to lockdown conditions and public need, first and foremost on the frontline in healthcare but also much more broadly in industry and retail logistics. Without all that innovation, how would the UK have achieved 90 per cent of the 2019 level of economic activity in 2020 with more than half of workers away from their normal place of work for much of the year through working from home or furlough?
Stagflation would present different problems to the pandemic. We would experience sustained rising costs of living and doing business, and there would be a shortage of opportunities to grow. But innovation is the antidote to both high costs and low growth.
What is innovation?
To see why, it is key to be precise about what innovation is. Contrary to what is often thought, it is not the same thing as technology. Technology is sometimes part of innovation, but innovation is a much bigger and broader economic force of nature. It is really all about customers. An innovative business is one that delivers to customers a product at a lower price or a higher quality/price ratio than what was available before.
In terms of lower price, think of Costco, which welcomes its customers directly into its no-frills warehouses and beats every single competitor on price, even the mighty Walmart and Amazon. In terms of a higher quality/price ratio, think of the Apple iPhone, which has incorporated an almost unimaginable range of functions into a mobile phone handset.