One of the biggest macroeconomic developments affecting today’s markets is rising inflation. In the UK the Consumer Price Index (CPI) rose by 7.8% year-on-year for April. Across the pond, the situation is even worse, with inflation creeping over the 8% mark. It seems that global inflation is certainly not “transitory” as previously hailed by Federal Reserve Chairman Jerome Powell!
So, how can I protect my portfolio from this rising issue? After selling some of my higher-risk investments this year, I’m now looking for some new stocks to protect me against the uncertain outlook. Below are three shares on my portfolio watchlist.
1. BT
My first pick is UK telecommunication giant BT (LSE: BT). The shares are up a healthy 10% year-to-date, and an even more impressive 24% over the last six months.
The first reason I like this stock as an inflation hedge is due to its extensive infrastructure. This allows BT to operate a near-monopolistic pricing strategy, which it can move in line with rising costs.
In addition to this, BT offers a healthy 4.04% dividend, which is above the FTSE 100 average. This passive income attracts me to BT, especially at a time when static money is depreciating.
However, there are risks ahead. BT has shelled out over £5bn in capital expenditure to upgrade its existing network. This is adding to its already heavy debt burden. With interest rates on the rise, this could come back to bite BT in the long run.
2. Taylor Wimpey
When it comes to passive income, Taylor Wimpey (LSE: TW) is a frontrunner. Offering a whopping 7.8% dividend yield, the stock could help me offset the effects of inflation – and that’s not even considering its future growth.
What’s more, this dividend is expected to remain high as the company is flush with cash. If this is the case, it could help me consistently put my money to work to combat rising prices. In addition to this, at 125p the shares trade on a very cheap-looking 8.2 price-to-earnings ratio.
However, a potential risk here is the fact that house prices have been rising for some time now. With rates on the rise and the threat of a recession looming, we could see a reversal of this growth, which would evidently leave housebuilders in trouble.
3. Shell
The energy sector has been a standout performer throughout 2022. Shell (LSE: RDSB) has not disappointed, rising 72% in the last 12 months. The main reason for this is the skyrocketing oil prices caused by the tragic Russia-Ukraine conflict. In the near term, these prices are likely to remain high due to the sanctions imposed on Russia.
In addition to this, Shell has a low valuation – trading on a P/E ratio of 10 – and a comfortable dividend of 3.3%. This dividend is expected to rise to 4% due to the cash-rich situation of the oil giant.
However, over the long term, Shell is likely to have to fork out billions to shift towards green energy, which could create big challenges in the long run.