As a UK share investor I need to take special steps to ensure I can still make decent returns as inflation rises. Prices in the UK recently rose at their fastest pace for 10 years, jumping 4.2% year-on-year in October. The Bank of England’s new chief economist Huw Pill said it could top 5% in 2022 too.
According to Link Group, the average dividend yield on UK shares sits at 3.5%. This isn’t enough to enable me to make a positive return. Here are three cheap UK dividend shares I’d buy to combat the problem of rocketing inflation. Each offers a forward yield north of 5% for 2022.
Pensions powerhouse
Pensions business Chesnara is high on my shortlist today. Not only does the small-cap trade on an undemanding price-to-earnings (P/E) ratio of 12 times for next year. Its dividend yield sits at a market-mashing 8.1% today.
Chesnara acquires pension assets from managers across Europe. It then uses the cash flows generated from the management of these assets to pay big dividends and to keep its acquisition-led model going.
The company has a long track record of paying big dividends, proving that its approach works wonders. I’d buy Chesnara despite the risk that changes to pension regulations could hit its operations hard.
A FTSE 100 dividend star
Telecoms colossus Vodafone Group’s another cash machine I’m thinking of getting my hands on. The dividend yield here for the years to March 2022 and 2023 sit at a mighty 6.7% and 6.9% respectively. It also trades on a forward P/E ratio of 12.8 times.
Okay, that earnings multiple isn’t exactly jaw-dropping. But it’s one I consider to offer terrific value given Vodafone’s exceptional worldwide sales opportunities. Experts at GlobalData think mobile data revenues will swell at an annualised rate of 7.4% through to 2026.
Critically, it thinks this will be driven by demand for 5G too, an area in which Vodafone is investing heavily. Even though competition is fierce I think Vodafone should still enjoy powerful profits growth over the next several years.
8.4% dividend yields!
I think gold miner Polymetal International’s another great FTSE 100 share for me to buy as prices rise sharply. This isn’t just because its yield sits at a meaty 8.1% for 2022. Its because the precious metals tend to rise in price when inflation soars and questions over the value of paper currencies come under scrutiny. Gold values just hit their highest since June, above $1,860 per ounce in fact.
I also believe Polymetal offers splendid value from an earnings perspective. Based on estimated 2022 earnings the mining share trades on a P/E ratio of just 8.1 times. The business of pulling metals out of the ground is complex and unpredictable. And earnings can take a sudden and severe whack if production problems occur.
Still, this is a danger I think is baked into Polymetal’s ultra-low P/E multiple. I’d buy this cheap UK share alongside Vodafone and Chesnara today.