This morning, the UK CPI inflation number for November was released. It was expected to be 4.7%, already a jump from the 4.1% number from the previous month. But the inflation figure beat expectations, showing a year-on-year gain of 5.1%. This is the highest number in a decade, and means that my cash in the bank is being eroded in value. Here’s how I’m planning on investing in stocks to try and reduce the negative drag.
Making use of dividends
One way I can try to beat inflation via stocks is by targeting dividends. When I buy a stock that pays out a dividend, I can calculate the dividend yield. Essentially, this looks at the annual dividend per share relative to the share price when I invested. Using this, I can get a percentage yield, which is a comparable number to other income-generating investments.Â
In this case, I can look to invest my spare cash in stocks that offer me a yield in excess of the rate of inflation. Even though the FTSE 100 average dividend yield is only 3.55%, there are some options with yields above 5%. For example, insurance companies such as Aviva and Legal & General both fit the bill. In the world of finance, money managers Abrdn and M&G also offer me a net positive inflation return currently.
So in order to beat the current level of inflation, I can consider investing in such stocks. There are a few risks that I need to be aware of. Firstly, inflation changes each month. It’s been rising over the past few months, so there’s no guarantee that it won’t keep heading higher. In this case, even my dividend yield might not be enough to exceed inflation next year.
Secondly, dividends aren’t guaranteed. If one of the dividend shares that I buy cuts the payout next year, my real return versus inflation could be negative.
Using high-growth stocks to offset inflation
The way I can go is putting my spare money in high-growth stocks. Such companies haven’t performed well over the past month or so. I recently wrote about how some of the top EV stocks have fallen over 30%. Souring sentiment around Omicron and high valuations have unsettled some popular stocks. Although this is an ongoing risk, the potential rewards are also high.
By investing in growth stocks, my unrealised gains from the share price moving higher should enable me to offset inflation in the long run. For example, let’s say annualised inflation stays at 5% for the next couple of years. If I can invest in high-growth stocks that see a share price gain of 10%+ over this period, I’ll beaten the inflation erosion.
I think this second option is more risky than the dividend strategy. However, to spread my risk, I can look to split my money between dividend and growth stocks. That way, I give myself some different angles to try and offset inflation via investing in stocks.