Inflation is on the rise again. The latest consumer price numbers for the UK have come in at above 3% year-on-year for the second consecutive month in September. This has two implications for my portfolio.
Inflation’s impact on my portfolio
One, if price rises remain uncomfortably high, the Bank of England will step in and increase interest rates. That may bring inflation down, but it will probably impact the already somewhat muted recovery. This will show up in companies’ financials and also in their stock market performances.
Two, while high inflation is around, it is eating into our income. This means that the real value of every pound we earn is declining. And that holds true for passive earnings or dividend income too. So, I would like to buy stocks that earn me higher dividend yields than the rise in inflation.
Gold stocks: a safe investment?
There is one stock that I think can potentially beat both these challenges. And that is FTSE 250 gold-miner Centamin (LSE: CEY).
Let me explain. During slowdowns, safer investments find favour as we saw last year when the pandemic caused havoc around the world. One such investment is gold, or its proxy, gold-mining stocks. From the time that the stock market crash happened in March 2020, when the FTSE 100 index fell by more than 10% to July last year, the Centamin share price doubled. So I expect that if brakes are slammed on growth to prevent inflation from rising further, gold will be back in demand.
In any case, I am of the view that a small percentage of my portfolio should be held in gold. This can serve as protection against total collapse of the system. It sounds implausible, I know, and it probably is, but we just never know what might happen at any time.
Inflation-beating dividend yield
Besides this, Centamin stock comes with a dividend yield of over 5%. This is well above the current inflation rate and even more so above the average annual inflation rate, which is expected to be at 1.5% for this year. So, the company’s yield is around 3.5 percentage points higher, which means that in real terms I would still gain if I bought the stock, even if inflation remains elevated.
In fact, for much of the past five years, its dividend yield has been significantly above 3%, which is the current inflation rate. In other words, it was not just a temporary spike in gold prices last year that led to better earnings for Centamin, and from there, better dividends. The company has consistently been returning high dividend yields to investors.
What I’d do
Moreover, its share price has crashed so much since vaccines were developed late last year, that it is now a penny stock. It does not help that its results in the first half of 2021 showed a decline in both revenues and profits. Nevertheless, I think it is a great stock to buy right now for the long-term security of my portfolio and also for an inflation-beating dividend yield.