The April reading of inflation from the UK came out earlier this morning. It was up 2% from the 7% of the previous month, meaning that it hit a 40-year high of 9%. With inflation showing few signs of slowing down, I need to find smart to find ways to stop my excess cash being eroded in value. Here’s how I’m thinking of using top stocks to achieve this.
Finding income via dividends
Firstly, I need to make an important disclaimer. Inflation is a variable that’s hard to predict. So although my numbers and ideas here are based on inflation being 9%, this will change in the future.
The first way that I’d use top stocks to help combat inflation is via dividends. I like this method because it allows me to see clearly what my actual net return is after taking into account inflation.
For example, let’s say I invested £1,000 into a top income stock like Persimmon. The property stock currently has a dividend yield of 10.98%. Assuming that the dividend per share stays the same, in the next year, I’ll earn £109.80 in dividends. Even after losing 9% to inflation, I’m still up almost 2% (£20).
Income stocks allow me to offset high inflation and preserve the value of my money. Hopefully, if the share price also increases, then I can make an even higher net gain when I come to selling the stock.
The main concern I have with this method is the unpredictability of future dividends. It could be the case that a housing downturn causes Persimmon to reduce the dividend, to the point that I’m not breaking even. To try and reduce this risk, I’d rather invest in a host of dividend-paying stocks to diversify.
Top stocks for share price gains
A second method I can use to try and beat inflation is picking top growth stocks. Over the past few weeks, there’s been a real tree shake in the stock market. Volatility has been high, and some stocks have seen a tumble. Yet in the long run, I still believe in the potential for multiple companies to outperform.
For example, over the past month Aviva, Scottish Mortgage Investment Trust and Anglo American have all fallen at least 15% in value. If I buy these top stocks now and enjoy a strong rally in the next year, I can use these gains as a way to offset inflation.
If I invested £1,000 in a mix of these three stocks and had an average gain of 10% over the next year, the share price rise would benefit me. Clearly, if I wanted to consolidate such gains, I’d need to sell the stocks to cash in. But the main principle here is that if I buy undervalued firms now, I can use potential gains as a safety net against high inflation.
The point I need to be conscious of is that the share price could fall, in which case I’d be losing not just from inflation but also from my capital depreciating. However, this is a risk I have to accept.
I’m considering buying all the above mentioned top stocks now as part of my inflation plan.