There was one big news story that was unmissable recently (besides Omicron-related developments, of course). And that was the build-up in annual inflation to 5% for November, that led to swift action by the Bank of England as it increased interest rates the very next day. These macro developments have an impact on my investments. And as a committed top-down investor, I am now assessing how to best invest, say, £1,000 in FTSE 100 stocks to aim for solid returns.
How I’d invest now
I like to invest with an aim to both grow my capital and earn dividends. At the present time, I reckon that is possible. Stock markets have done fairly well in the last one year. And if the recovery continues, even with stops and starts, I think they could continue to grow. This is good news for capital gains. It is possible that inflation could play party pooper for the stock markets in 2022. FTSE 100 companies have repeatedly flagged rising costs as one of their current challenges. But even if this does slow down growth in the index, I am fine with that because I am a long-term investor and believe one year’s gains are less relevant than those of a multi-year period.
High dividend yields are preferable
However, I do want my dividends to be lucrative for me. Considering that next year is likely to be one where we need to brace for higher inflation, I would like my payouts to beat this. Normally I like to reinvest my dividends, so one year’s high inflation might not matter as much as long as I still get positive returns over a period of time. However, I do like the option of withdrawing or not reinvesting dividends if I want to.
To that extent, I would like to buy stocks that offer me a high enough dividend yield to earn me a positive real return at a time of rising inflation. There are various inflation predictions available, but going by the latest number of 5% for November, I reckon that the UK’s Office of Budget Responsibility might just be right in predicting 4% inflation on average next year.
Potential FTSE 100 investments for 2022
This means my FTSE 100 investments should offer me a dividend yield of at least that much in the next year. Turns out, that there are plenty of stocks that do this. Considering that it has been a better year for the FTSE 100 index after last year’s dividend drought, its average dividend yield is at 3.5%. As some in the index have lower dividend yields, this logically implies that there are at least some stocks that have a higher yield than that. These include commodity stocks, insurance companies and even real estate companies.
I would make my investment in £1,000 in some of these FTSE 100 stocks. Even if we were to go into another lockdown for some time in 2022, and inflation drops as a result, I think these stocks could still hold me in good stead.