Inflation-related news gets worse every month. As per the latest official release, it is now at 7% on an annual basis for March. And it is expected to get even worse before the year ends. For you and me, this means that each pound is now worth less than was a year ago.
It also means that the passive returns on my investments are also worth less. Moreover, dividend increases on FTSE 100 stocks are less likely to happen now, because companies’ costs are also rising. Even then, there are a few stocks that earn me inflation-beating dividends right now. And I believe they could do so in the near future as well.
Persimmon’s inflation beating dividend yield
The first is the house builder Persimmon (LSE: PSN), with a dividend yield of almost 10%. This is higher than both the current inflation levels and any inflation forecasts as well. I also believe that the company would be able to sustain its dividends in the future. I was skeptical of this a few months ago, when the government had withdrawn its fiscal stimulus. There was a widespread expectation of a cooling off in house prices, if not a complete crash in the housing market.
But the market is going strong. In fact, the latest Halifax house price figures show that in March, prices grew by 11% on a year-on-year basis. The company itself is optimistic about this year as well. At the same time, its share price has corrected a lot since last year. It is trading around 30% below even its pre-pandemic levels. This means it is a high dividend yield stock that is also quite cheap right now. I have already added it to my portfolio.
Rio Tinto’s a FTSE 100 commodity play
Another FTSE 100 stock in my portfolio for similar reasons is the Anglo-Australian miner Rio Tinto (LSE: RIO). It too has a dividend yield close to 10%. And if I was not sure earlier, I am far more certain now that it could continue to pay these dividends. Commodity prices were widely expected to correct in 2022. But due to the unfortunate Russia-Ukraine war, pressure on these prices has built up again.
This of course is also one reason why inflation is rising. But miners appear to be on the relatively safer side as far as price rises go. Their end products’ prices are rising, which could offset the increase they might experience in costs. Rio Tinto’s share price has climbed fast, unsurprisingly, in the last month quite likely as a result. Yet, with a price-to-earnings ratio of six times, it is still quite cheap.
What I’d do
There is of course always a chance that the global economy might slowdown so much that a stagflationary situation results. Such a high price and low growth scenario is not good for any company, even if they seem well placed now. I would look out for a build up in that trend. But for now, the situation seems alright for both stocks and I would load up on them.