The last time UK inflation hit 9% was over 40 years ago in 1981. Inflation places us investors in a difficult position. I’m receiving almost zero interest on money held in the bank, which means this year my spending power will reduce by that 9% inflation rate. This is a shocking devaluation of savings. So how can I fight back? By investing sensibly in my Stocks and Shares ISA, where all gains and income held in the ISA are also tax-free.
The following three stock market investment sectors and their associated companies have historically been a good way to keep pace with inflation, i.e. for share price increases plus dividend income, resulting in my ISA’s total value increasing by at least the 9% inflation rate this year.
Pharmaceuticals
When there’s a cost-of-living crisis, people become more picky about what they spend their money on, myself included. But healthcare is always near the top of the list of spending priorities, and pharmaceutical companies can raise their prices in line with inflation, knowing their customers will probably still buy their products. Personally, I get hay fever at this time of year, and if I had a choice of buying a good quality nasal spray or going to a pizza restaurant but continue suffering from hay fever, I would buy the spray and ditch the pizza. The restaurant loses out, but not the pharmaceutical company that makes the spray and the chemist that sells it.
Partly for this reason I have bought AstraZeneca shares plus that other pharma heavyweight, GlaxoSmithKline, and they are long-term holds for my Stocks and Shares ISA. AstraZeneca also has a dividend yield of 2.1% and GlaxoSmithKline yields 4.6%.
Oil
A rising oil price is a major cause of inflation, so of course it usually keeps pace with the inflation rate. Indeed, the oil price has almost doubled in the last year. For this reason, oil explorers and refiners BP and Shell are currently making huge profits. Okay, there is some political risk with a windfall tax on “excess profits”, but recent government measures in this respect are more than offset by the amount of cash the companies are making.
I have bought BP shares and am considering buying Shell stock, too. And for dividends, BP yields 3.75% and Shell 2.91%.
Tobacco
We all know how much smokers like their ciggies and vaping products. Even now when money’s tight, recent results from Big Tobacco companies like Imperial Brands and British American Tobacco showed sales and profits holding up nicely. And the dividend yields are high, at 7.8% for Imperial Brands and 6.2% for British American Tobacco. I have bought shares in the former and am also considering buying some of the latter’s.
I believe the above companies are excellent hedges against inflation for my Stocks and Shares ISA. However, please bear in mind the old adage that the past is no guide to the future and the above shares are also impacted by many other factors unrelated to inflation, so their price could fall.