How I’d invest £2,500 in FTSE 100 stocks for 2022 as inflation rises

Andy Ross thinks FTSE 100 stocks like these could be key in 2022 if top UK shares come back into favour with investors as inflation takes hold.

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We’re still just a month into 2022 but FTSE 100 stocks have performed quite well so far. That’s especially so compared to the tech-heavy US market. If worries over inflation and rising interest rates persist, this could be the big theme of 2022. So as inflation rises, this is how I’d invest £2,500 in FTSE 100 stocks to try and outperform the market and increase the value of my Stocks and Shares ISA.

New energy please

I’ll avoid industries that may be dominant in the FTSE 100, but are structurally challenged. That rules out oil and gas, as well as tobacco. Investing long term, for me at least, is about finding value in companies from industries that will grow steadily, and ideally, that aren’t particularly cyclical or volatile.

SSE (LSE: SSE) is a value share that seems to combine income with steady future growth potential. A dividend yield of 5.2% is very healthy and well ahead of the average for the FTSE 100. It’s certainly not a racy tech stock – but so far this year, that has been a good thing. The downside to buying stock of an energy company like SSE is the need for high levels of investment in the business. This can dent profits and put off some dividend seekers. 

That said, the energy group is well placed to benefit from the transition to renewable energy. According to the SSE website, it has 4GW of onshore wind, offshore wind and hydro. It’s currently very focused on the UK and Ireland, but the group says that it’s actively exploring opportunities to extend into new markets. If successful, that could boost growth and help the company keep paying a high level of dividends. SSE is the kind of high income share I like so I’ll keep an eye on it, but I’m in no rush to add it to my portfolio just yet. 

My favourite FTSE 100 stock

As a more highly rated FTSE 100 share, 2022 to date has been tougher for beverages group, Diageo (LSE: DGE). For me though, that makes it more tempting to buy the shares, especially after its strong recent results.

Last week’s first-half report showed that net sales rose 15.8% to £8bn, while operating profit at the Guinness, Johnnie Walker and Tanqueray maker rose 22.5% to £2.7bn and the interim dividend was lifted by 5% to 29.36p a share.

One of the big questions when it comes to investing in the shares now is: can it grow enough to justify a P/E of 30? That’s tricky to answer and some investors will undoubtedly come to the conclusion that it’s not. Also, as a higher rated share, any bad news is likely to see the shares fall hard. 

There’s no doubt it’s expensive, but I think high margins, strong brands and international sales all combine to make it a high-quality company. 

Diageo has been growing its dividend continuously since the 1990s, so it’s a very steady company with a large and still-growing international customer base. It has adapted well to increased demand for whisky and gin and what consumers want to drink generally. Also important in inflationary times is the fact that it has pricing power, especially as it owns premium brands and less-price-sensitive drinkers.

This all bodes well for a share I already hold and which is without doubt my favourite FTSE 100 stock. I’ll be adding more. Chin-chin.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Andy Ross owns shares in Diageo. The Motley Fool UK has recommended Diageo. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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