Beating inflation is a solid investment goal for 2022, with costs having risen 5.4% in the year to December. But I wouldn’t let a one-off economic shock derail a good long-term investment strategy. And my FTSE 100 dividend-based approach aims to beat rising prices anyway. So current conditions help me focus on that.
What will I add to my ISA in 2022? I want decent and well-covered dividends, coupled with modest valuations to help me avoid anything looking overheated. These are the stocks I’m looking at.
It’s hard to ignore British American Tobacco. Estimates suggest a dividend yield of more than 6% in 2022. British American has been progressive, upping the 2021 dividend by 2.5%. With the attractive yield, it looks like a good hedge against inflation to me.
If the bottom should fall out of the smoking market and vaping volumes not compensate sufficiently, that might send BATS shares down. But I see no real sign of that happening worldwide. Forecast cover is around 1.5 times, which I think is good enough. And a P/E of under 10 suggests sufficient safety to me. If I didn’t have ethical qualms, I’d have snapped up BATS shares years ago.
Natural resources vs inflation
Shell is also among the FTSE 100 6% forecasts. I’ve often considered Shell and BP, and I do see them as possible inflation busters in 2022. But with no real idea what a future carbon-neutral valuation might look like, I’m keeping away.
Thinking about natural resources, I’m once again drawn to mining giant Rio Tinto. Shareholders have enjoyed better than 6% yields for the past three years, and analysts have something similar on the cards for 2022. The downside is that the commodities business tends to be cyclical, and Rio has already enjoyed several years of rising earnings. So an economic squeeze might hurt.
Dividend cover should be a little less than 1.5 times, which is perhaps a bit thin. But a trailing P/E of 9.5 might be enough valuation safety for me. I might finally buy Rio Tinto in 2022. Alternatively, Glencore offers a smaller predicted yield, but stronger cover by earnings.
Chronic shortage
I also have my eye on Taylor Wimpey to add to my holding in Persimmon. The yield has been depressed for a couple of years. But a healthy 2021 interim suggested better dividends are on the way back. The share price dipped in January, and we’re now looking at a 6% fall over the past 12 months. Full-year results won’t be with us until 3 March. But the company’s full-year trading update spoke of a “significant improvement in operating margin“.
Economic risks do threaten the whole sector in 2022, and there’s a real risk of a weak year. But I can see our chronic housing shortage giving shareholders a helping hand to beat long-term inflation.
FTSE 100 holdings
I’m going to finish with an investment trust that’s in the FTSE 250. But it holds a lot of FTSE 100 stocks, so I reckon it counts. It’s City of London Investment Trust, with a 4.9% dividend yield in 2021. It’s raised its dividend every year for 55 years in a row.
The 2021 uplift was only 0.5%, mind. And that highlights a dependency on the UK economy which might squeeze 2022 gains. But I see the yield itself as an attractive inflation buffer. And there are plenty more investment companies with lengthy dividend gains to choose from.