Beating Inflation Requires a Portfolio With All the Right ...

We all hope to get rich owning equities, allowing for a stress-free life.

Most of us, though, would settle for just growing our wealth via beating inflation and taxes over the long-term. The graphic below, from chartoftheday.com, shows that stocks have accomplished that feat admirably over the past 120 years.

The same can't be said for long-term owners of bank CDs or U.S. Treasury bills, notes and bonds. Understanding that narrows the list of possible inflation hedges to just a few asset classes.

Real estate has done OK, but is not liquid, requires active management and is subject to ever-rising property taxes.

Precious metals have their moments and delivered strong gains since last bottoming in December of 2015. Gold produces no income, though, and is hard to trade without large frictional costs.

For my money, stocks are clearly best. They offer current income through dividends and/or covered call writing and they've proven to work over long periods throughout history.

Here's a specific company for conservative investors looking for a nice combination of growth and income.

Ingredion (INGR) provides raw materials to other food producers in North America, South America, Europe, the Middle East, Africa and Asia. They just bought a 100% interest in a plant-based ingredient company to take advantage of the shift in consumer preferences away from red meat.

EPS dipped a bit in 2019 and 2020 but appear primed for a sustainable rise in 2021 and beyond. Despite that, INGR shares traded on Oct. 30, 2020 at just below $71, down from an all-time peak north of $146 and its YTD high of $99.51.

I see opportunity here. From 2013 through 2019 Ingredion averaged about 15-times earnings, accompanied by around 2.10% in current yield. At last week's close those figures were just 11-times next year's estimate along with 3.61% in yield. 

A simple regression-to-the-mean valuation rebound suggests INGR could be back above $96 by Dec. 31, 2021. Hitting that modest goal would provide greater than 39% in total return. That should easily outdistance inflation and taxes.

Is my goal far-fetched? Not at all. In fact, INGR topped out between $99.50 and $146.30 during each of the last six years including 2020 year to date.

Yahoo Finance is just slightly more conservative in their 12-month target price for INGR. It sees $87.40 by this time next year plus dividends. Achieving only that goal would generate almost 27% from here.

Independent research house Morningstar is far more enthusiastic than either Yahoo Finance or me. It calls Ingredion a 5-star, best buy. In fact INGR is now more than $11 per share below their threshold for attaining that status.

If Morningstar is correct, INGR is worth $120 right now. Based on its past trading history they may be right. 

Option savvy traders who like Ingredion's prospects, but want even greater safety, might wish to short some of its Apr. 16, 2021 put options at strikes from $70 - $85. Actual pricing from 4 p.m. on Oct. 30 is shown below, when INGR was changing hands at $70.89.

Worst-case, forced purchase prices dropped to from $63.60 to $67.90 providing downside protection of 4.2% to 10.3% versus the trade inception price.

Is that enough? Barring unexpected bad news it almost certainly is.

Owning INGR at the $66.40 "if put" price on the April 2021 $85 put would have been a profitable holding for all but two weeks dating back more than a full half-decade.

In stock market risk/reward terms it just doesn't get much better than that.

Ingredion offers the rare combination of high-quality, low risk, a generous income stream and substantial upside.

Buy some shares, sell some puts or consider doing both. I might. I have no positions in INGR right now, but I expect to get long the shares and short INGR puts in the near future.

At the time of writing, Price had no positions in INGR, but expects to get long the shares and short INGR puts in the near future.