Inflation (as measured by the Consumer Price Index) hit 7% in the past 12 months, and is expected to keep climbing. Periods of high inflation usually lead to lower returns on the stock market. This calls for high-yielding FTSE 100 dividend stocks to buy that can provide my portfolio with some protection from inflation.
With inflation expected to continue rising, income investors like me are worried. Particularly as the FTSE 100’s yield is only 3.73% currently.
To put this into context, the maximum dividend yield of the FTSE 100 index over the last 20 years was back in 2020. At one point during that year it was at 7%, which would have at least been commensurate with the current level of inflation investors are faced with today.Â
So, with persistent inflation looking like the medium-term norm, where can I turn to find stocks that may provide an inflation-protected income in the meantime?
Imperial Brands (LSE:IMB) is a good place to start. Tobacco stocks are cheap, and the British cigarette maker is one of the cheapest. The stock trades around 6.8 times projected 2022 earnings, significantly lower than the sector average of 11.4 times.
As a value-focused investor, it heightens the stock’s attractiveness. And what’s even more appealing is that it is one of the highest-yielding stocks in the FTSE 100, with a forward yield of 8.56%. Moreover, tobacco stocks can be a good hedge against inflation, as higher prices typically don’t hurt demand. Plus, I believe a lot of the bad news may be already priced in, hence the current low valuation.
With my income-focused investor hat on, the stock can provide me with sustainable real income while inflation continues to persist.
However, headwinds such as falling cigarette sales and the challenge of aligning with ESG standards may be the reason that valuations of tobacco stocks look cheap compared to other sectors.
Alternatively, Phoenix Group (LSE:PHNX) is a stock with a yield currently higher than inflation, with additional growth potential. Its shares are now yielding over 8%. As interest rates rise, an insurance company’s liabilities (in the form of life policies) decline. In addition to this, the company is now writing more new business than the decline in its legacy business, so it is likely that the current dividend has the potential to grow from here.
There are no guarantees here, but these are the types of businesses and assets that seem more capable of defending against the effects of inflation than others, and is a key reason I intend on buying their shares.
Of course, all this is assuming that inflation will remain a problem and interest rates are going to rise on a sustained basis. Those are both possibilities but not certainties. But I am dependent on portfolio income and believe inflation will continue to persist, so am seeking out undervalued stocks that still have the ability to pay out growing dividends despite the choppy environment.