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There’s a troubling trend going on in the United States, and it has to do with household income.
Income inequality is real. The middle class as we know it is shrinking. Over the last 45 years, Americans have been steadily shifting into the upper or lower classes.
The chart below shows both the upper and lower classes growing while the middle class declines.
Source: CNNMoney
There’s no easy answer as to why we’re seeing a hollowing out of the middle class. The question investors need to ask now is: Is there a way to profit from the trend?
In truth, there are a number of ways to play this trend. The most obvious way is to buy up stocks that will benefit from a growing upper and lower class.
Here are the top stocks to buy at the two ends of the income divide:
2 Stocks That Benefit From a Growing Lower Class
The fact the lower class is growing is troubling enough, but income in the lower class has been slowing. That means people in the lower class have fewer dollars to spend.
There’s no better company to play this trend than discount retailer Dollar General (NYSE: DG). It’s a broader play on the trend away from large retailers like Wal-Mart (NYSE: WMT), but it also offers necessities and consumer staples items that people – regardless of their income class – must buy.
Dollar General likely needs no introduction. It’s the largest dollar-store company in the U.S., and its list of positives is long. It pays a 1.2% dividend yield, has a 13% return on invested capital, and trades at a 25% discount on a forward price-to-earnings basis to closest peer Dollar Tree (NASDAQ: DLTR).
Then there’s the idea that people in the lower class still need furniture and electronics, but they just might not be able to pay for it all upfront. That’s where rent-to-own retailers come into play.
The best play here is Aaron’s (NYSE: AAN), which is down 25% year-to-date on weak earnings. But it’s still the leader in the rent-to-own market, allowing customers with poor or no credit to purchase furniture through a payment plan.
Aaron’s has more than 2,000 stores across the U.S., but it also made a foray into the virtual rent-to-own market with its purchase of Progressive Finance last year – a move to appeal more to the millennial generation.
2 Stocks That Benefit From a Growing Upper Class
Let us not forget the other end of the spectrum that’s growing: the upper class. The big key here is that the rich continue to get richer, with upper-class median income rising by 47% from 1970 to 2014 and outpacing all other classes.
One of the best plays on this end of the market is a relatively new stock, Ferrari (NYSE: RACE). It’s another name that needs no introduction. The company was recently spun off from Fiat Chrysler (NYSE: FCAU).
Ferrari is not only the best pure-play on high-end cars, but it’s also one of the best auto operators around in terms of margins. Ferrari’s profit margins and returns on equity and invested capital are well above all the other automakers.
Another angle is retail, which has been beaten down of late. The best play here is Nordstrom (NYSE: JWN).
Like the rest of the retail industry, Nordstrom has been hit hard. But the beauty of Nordstrom is that it’s a play on the upper class and the high-end middle class with its chain of Nordstrom Rack stores. The company is benefiting from its role as a pioneer in online sales. It also pays a 2.7% dividend yield.
Recognizing the power of trends and demographic shifts can be a big benefit to investors. The increase in income inequality, while not a positive to society, could be a plus for your portfolio.
This Is Making Ordinary People Rich
Ordinary people across America are getting insanely rich. Take Gladys Holm. She never earned more than $15,000 a year as a secretary. But by making one simple move, she was able to leave an $18 million fortune to a children’s hospital when she died. There’s many more just like her.